One of investing's key principles is that risk and reward go hand in hand. To make a lot of money, you're going to have to take a lot of risk. Buying shares in posh cooker maker Aga is a case in point. During the heady years of the credit bubble, upmarket Aga and Rangemaster cookers were flying out of the factories. A rampant housing market saw people upgrading their kitchens with granite worktops, hardwood flooring, and expensive, desirable equipment.
Those days are well and truly over. Not only are people moving house far less frequently (transactions have roughly dropped by half compared to the days of the boom), but remortgaging a house to fund the fitting out of a new kitchen is also far more difficult than it once was. On top of that, big, guaranteed bonuses from the City are also a distant memory.
So it's not really a surprise that sales of all of Aga's range of cast-iron cookers has fallen from 19,600 in 2007 to 11,000 last year. It's a luxury item that's very hard to justify if neither your income nor your house price is rising by much.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
As if that wasn't bad enough, Aga also has a massive pension-fund headache. It has lots of retired pensioners to keep paying from the days when it was an engineering and metal-bashing company called Glynwed. Like many pension funds, Aga's is having to put aside more money to pay pensions as interest rates on the corporate bonds used as the benchmark keep on falling.
Aga Rangemaster (LSE: AGA)
The numbers involved make for scary reading. The last actuarial valuation said that the shortfall was £161m. Aga is now saying things are even worse. This is a big number when its market capitalisation (the sum total of all the shares in issue) is only around £50m.
So why would anyone in their right mind want to invest in a distressed pension fund with a fancy cooker business on the side? The main reason is because trading, for what is a decent brand, has got as bad as it can be. Aga carries high levels of fixed costs from its cooker and equipment manufacturing.
To use the City jargon, the company is highly operationally geared. This means that even a modest uptick in sales could lead to a big increase in profits.
That could be exactly what we see next. There are now signs that the business has stabilised. Aga's new products are cheaper to run and sales are rising. Rangemaster exports to Europe are growing, while there's still lots of potential to grow sales to American consumers. The company has also done a deal to sell cookers in China.
And while these cookers are expensive, they are quality products that are built to last. It might take a while, but it's quite possible that export orders and sales could start making the company some meaningful money in the years ahead.
City analysts expect profits to grow. They see earnings per share coming in at 9.2p in 2013, putting the shares on a modest price/earnings (p/e) ratio of 7.9 times. You won't get a dividend until the pension fund is sorted out, but at this level the shares are worth a gamble.
Verdict: SPECULATIVE BUY at 73p
-
Should you invest in UK equities?The FTSE 100 hit a record high this week, but UK equities remain unloved and undervalued compared to their global and US peers. Should you snap them up at a discount?
-
State pension errors: DWP urged to check for mistakes among divorced peopleFormer pensions minister Steve Webb says there are a high number of divorced women on low state pensions. Now MPs want the DWP to check if there were any errors in “potentially underpaying men and women who are divorced”.
-
Somero: trading this overlooked bargainFeatures Mechanical-screed maker Somero dominates its niche and is attractively valued. Matthew Partridge picks the best way to trade it.
-
How to find big profits in small companiesCover Story The small- and micro-cap sectors are risky and volatile. But with careful research and patience, investors could make huge gains. Matthew Partridge explains how to find the market’s top tiddlers.
-
The hidden gems on Aim, London's junior marketFeatures Aim, London’s junior market, is risky – but you can find solid stocks at low prices. Scott Longley reports.
-
Is Aim finally coming of age?Features The Aim market of mostly smaller companies has traditionally been seen as a bit of a backwater. Is it time to change that view? Matthew Partridge talks to Paul Latham and Richard Power of fund management company Octopus.
-
Three Aim-listed firms that will thrive in a post-Brexit worldOpinion Matt Tonge and Victoria Stevens of the Liontrust UK Smaller Companies Fund pick three Aim-listed firms that will survive Brexit turmoil.
-
Fetch! The Chinese small-cap stocks to buy in the Year of the Dog
Opinion Each week, a professional investor tells us where she’d put her money. This week: Tiffany Hsiao of Matthews Asia selects three Chinese small-cap stocks with exciting potential.
-
Small and mid-cap stocks with big potential
Opinion Professional investor Guy Anderson of the Mercantile Investment Trust selects three small and medium-sized firms with promising prospects that the market has missed.
-
Get cheap, reliable growth from smaller companiesFeatures One of the most reliable long-term investment trends is the long-term outperformance of smaller companies over blue chips. Max King picks some of the best ways to buy into this growth.
