Gamble of the week: a challenger bank and a fashion house

published 18 March 2016

Alex Williams picks two shares for the brave to take a punt on. This week; a challenger bank and a fashion house.

Metro Bank

Metro is hoping to break into the Big Four of UK banking, as Barclays, HSBC, RBS and Lloyds all battle bad reputations and clunky IT infrastructure. So far it's sucked in 700,000 customers and over £5bn of deposits since it launched in 2010.

American founder Vernon Hill (who counts Donald Trump as a golfing partner) has launched similar banks in America and aims to attract a cult-like following of customers. The bank has a conservative loan book of just £3.5bn, making it one of the best-capitalised banks on the high street. The cost of its new stores and its low loan-to-deposit ratio means Metro is losing money, with losses of £49m last year. But the IPO has injected fresh capital, nine new stores will open this year and Hill has ambitions to enter the FTSE 100.

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Hugo Boss

But the longer-term story is intact. Hugo Boss has consistently high returns on capital and has turned a profit every year since the 1980s. It has a strong online business and its profit margins are up there with Burberry and higher than Louis Vuitton. Despite trouble in China, the group's total sales have actually risen in the last year.

The dramatic drop in the share price is a healthy re-rating. Twelve months ago, Hugo Boss was trading at 25 times earnings with a 3% dividend yield, leaving little room for error. But at 12 times earnings and a 6% gross yield, the shares have gone too far in the other direction.Gambles of the week