Three unloved stocks to fall for
With stockmarkets riding high, you may be forgiven for thinking there is no value left. But professional investor Stuart Widdowson believes you can still make money by buying value stocks with strong growth potential. Here he picks three that, until now, have been off most investors' radars.
Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: Stuart Widdowson, investment manager at SVG Investment Managers.
The small-cap index has rallied more than 60% since hitting bottom in March 2009. With growth stocks increasingly priced for performance and recovery stocks for perfection, is there any value left? I believe long-term investors can still make attractive risk-adjusted returns by investing in a select number of recovery stocks quality companies valued at modest multiples of underlying and/or growing cash flows, trading at a significant discount to what past merger and acquisition deals within their peer group suggest they're worth. Buying plays where all four drivers of shareholder value are present stable or growing sales, operating margin improvement, degearing and rerating should cut downside risk. The following three stocks are 'unloved'; off investors' radars. But their share prices could at least double in value over the next three years, excluding any sales recovery.
E2V Technologies (LSE: E2V) is a global leader in the design and manufacture of specialist electronic components and low-volume/high-value, high-reliability semiconductors. It supplies the medical, aerospace, defence and industrial markets. A debt-funded acquisition in September 2008 left the balance sheet over-stretched as the slump began. In 2009 a new chairman and finance director were appointed, and a balance-sheet-strengthening fund-raising was completed. Strong cash flow should see much of the debt repaid by March 2013. A restructuring programme under way in the UK and France should raise operating margins to at least 15% on flat sales. With high operational gearing, any sales recovery should boost margins further. The 0.75 times EV (enterprise value)/trough sales rating is a material discount to its intrinsic value and its US peers.
Lavendon (LSE: LVD) is a leading equipment-hire company. Having bought peers and renewed its rental fleet, it entered the downturn with a geared balance sheet; a recent fund-raising has fixed this. Lavendon will benefit from work at the Olympics, offsetting the soft commercial building market over the next 18 months. It also has significant scope to age its well-invested fleet to maximise cash flow. This drives rapid degearing and a transfer of value to equity holders, underpinning strong returns even if there is no top-line recovery. Trading at 1.25x EV/sales, the bottom of its core range of 1.25-2x, a rerating is likely too.
Despite generating more than £100m Ebitda last year, Mecom (LSE: MEC), the European local newspaper group, is so unloved that for much of the past six months there have been no official market forecasts a classic contrarian buy signal. The business model is far better than for UK local newspaper groups. A higher proportion of sales comes from resilient subscriptions, content is higher quality, and it has made good progress in growing digital and ancillary revenues yet Mecom trades at a discount to these peers. David Montgomery has steered the group well through an advertising recession and the business is well placed for recovery. A fund-raising and asset disposals in 2009 have cut balance-sheet risk significantly, profits seem to have troughed last autumn, and total advertising revenues are stabilising. Using the modest EV/sales or EV/Ebitda multiples achieved by the disposals in early 2009 implies a target share price of more than 530p.