The current weakness in the markets has been caused by fears that inflation and interest rates are on the rise, and that this will hit global growth prospects. However, the indiscriminate sell-off in the equity markets has created buying opportunities if you're willing to take a medium to long-term view. I'm looking for cash-generative stocks that have a good fundamental business model and are attractively valued whether mid or large-cap. Many investors have been avoiding stocks with exposure to the UK consumer. That's a mistake. I'm not predicting a strong rebound in UK consumer spending, but I do believe that certain stocks have been too harshly treated by the market.
One of these is Halfords Group (HFD), the automotive parts and accessories retailer. It is exposed to the growing satellite-navigation systems market, the specialist nature of which leaves it fairly well insulated from competition from rival retailers such as Tesco. Halfords is showing strong like-for-like sales growth, which is rare among UK retailers. The group is generating above-average earnings growth and cash flow, which will allow it to return some cash to shareholders. Its current valuation and dividend yield make it look extremely attractive.
UK housebuilding has performed poorly due to its exposure to the UK consumer. Mortgage approvals and house prices have, however, begun to strengthen. Halifax showed a 6% increase in house prices between December 2005 and April 2006, and mortgage approvals for the first quarter of 2006 were up 29% against the same period last year. McCarthy & Stone (MCTY), a specialist housebuilder, has received bid approaches rumoured to have valued the firm at more than twice its asset value. Redrow (RDW), Bovis Homes (BVS) and Bellway (BWY) are all currently trading on around 1.3 times their asset value. I expect to see a 50% rise in their current share prices.
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I also like the reinsurance broker, Benfield Group (BFD). The reinsurance market suffered after the hurricanes in the US last September, and firms have been repairing their balance sheets. Now, increasing demand for reinsurance cover will lead to rising reinsurance rates. Benfield will be a direct beneficiary of this and, because it only acts as a broker earning commission, it takes no underwriting risk and so will not suffer any losses from future catastrophes. Benfield's robust balance sheet and strong cash generation will allow it to return cash to shareholders. It offers above-average, sustainable earnings growth at a low rating, with a dividend yield of 3.7%.
So what have I been selling to fund these purchases? I bought Ashtead Group, the US plant-hire company, at 80p in October 2004. Following consistent earnings upgrades, the shares recently reached 235p and I sold my whole stake. I bought United Business Media in January 2005 at 460p. After a restructuring of the group and sale of non-core assets by the new chief executive, the shares reached 750p. Again, I recently sold all my stock.
The stocks Mileen Rash likes
12mth high 12mth low Now
Halfords 355p 267p 303p
McCarthy & Stone 908p 511p 858p
Redrow 442p 380p 442p
Bovis Homes 945p 588p 765p
Bellway 1,286p 815p 1,048p
Benfield Group 401p 253p 342p
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