Three to buy
Rising operating costs, higher inflation and faltering consumption have dented confidence in retailers. Despite positive first-half results for the six months to 30 July, the market wiped 8% off JD Sports’ shares, leaving them at their cheapest valuation in nine years. And “tailwinds to profit growth... should materialise in the second half”.
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Supply shortages are easing and organic sales in North America are growing again. Wholesale deals with Nike and Adidas “give it an edge over rivals”. Given the medium-term growth potential this looks a good time to buy in. 103p
Engineering and consultancy group Ricardo makes a large proportion of its sales from services related to the fossil-fuel industry. But it “can justifiably be considered an environmental, social and governance [ESG] investment”. Revenues from green consulting, as the automotive and industrial divisions benefit from a shift to decarbonisation and sustainability, are growing.
Ricardo boasts more than 500 clients and a strong balance sheet. The company’s progress towards a “greener and more profitable future” is “barely reflected” in the price of the shares. 420p
The Sunday Times
Spirent Communications has found a “dull niche” in the telecoms sector testing networks to ensure they don’t collapse under pressure and monitoring the health of GPS systems. Customers include Cisco, Nokia and Verizon. Firms are “placing an ever higher value on connectivity”, so Spirent’s services are in high demand. The order book for the first half of 2022 reached a record $238m and the dividend policy is “generous”. 270p
Two to sell
B&Q owner Kingfisher has enjoyed easy gains throughout the pandemic, but last week it cut pre-tax profit guidance for the 12 months to the end of January 2023 to between £730m and £770m. The middle of that range marks a 21% decrease from last year. This reflects uncertainty over the impact tighter budgets will have on discretionary spending, including home improvement.
The extent to which it will have to discount prices to attract “cash-strapped customers” is yet to be determined; lowering prices will further hamper profitability. The shares may look cheap on earnings expectations, but further falls look likely in the short term. Avoid. 234p
The Hut Group has announced the resignation of two of its directors with no explanation on the same day that it reported an increase in pre-tax losses. This is “never a good sign”.
The results for the six months to 30 June provide a clue: the online retailer, which sells own-brand and third-party fashion, beauty, and home goods, posted further losses amid “adverse macroeconomic conditions” and an increase in the cost of raw materials. The trading environment for retailers “looks set to get worse before it gets better”.
What’s more, The Hut Group has lost its cushion of net cash to fall back on. The business has also yet to make a profit. While analysts predict the company’s losses will get smaller, “they still forecast it will be haemorrhaging money at the end of 2024”. Investors still holding the stock should cut their losses. Sell. 40p
...and the rest
Home construction firm Cairn looks set to benefit from the boom in the Irish property market and the continued need for more housing. It is trading at a discount to book value. Buy (83p). Big Technologies produces devices to track people; 98% of its revenue comes from the criminal justice system. It boasts strong cash generation, but a forward price/earnings (p/e) ratio of 37 looks expensive given that larger companies could provide competition. Sell (290p).
The Mail on Sunday
These two new companies are due to join the market in the next few weeks and are worth keeping an eye on. The Sustainable Farmland Trust offers UK investors access to the US agricultural market, where a long-term stake could reap handsome rewards. Independent Living REIT could fill the gap in the supported-housing market. It has a strong pipeline and at £1 a share the stock “should provide rising, long-term income and a decent hedge against inflation”.
The SDCL Energy Efficiency Income Trust focuses on investments in energy efficiency. It will benefit as firms face pressure to cut costs. Buy (114p).
Games Workshop is facing the same pressures as other retailers. Its shares have fallen by 47% from last year’s peak. But the business remains solid and has long-term growth potential. The price weakness presents an “attractive entry point”. Buy (6,380p). Construction company Galliford Try’s market value has shrunk amid fears of a recession. But a comfortable cash pile, improving margins, and a dividend yield of 4.9% all bode well. The shares are a buy (153p).
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