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Neil Woodford just snapped up a bargain stock you’ve probably never heard of

Neil Woodford. Source: Woodford Investment Management Ltd

Renowned fund manager Neil Woodford is well known for his big investments in blue-chip companies. FTSE 100 giants in the pharma and tobacco sectors — AstraZeneca, Imperial Brands, British American Tobacco and GlaxoSmithKline — are the top holdings in his flagship equity income fund.

However, he’s certainly not averse to looking for stocks outside the mega-caps. Indeed, the market was notified this week that he’s bought a £70m stake in a business that many readers have probably never heard of. The company in question only joined the stock market this time last year and is listed in the FTSE SmallCap index.

However, like Woodford, I’m not put off by this. The company has a long trading history (it was the building products division of conglomerate Hanson back in the day) and it’s a decent size, with a market cap of about £450m. Furthermore, it looks to be a bargain buy.

A big show of confidence

Forterra (LSE: FORT) announced this week that Woodford has taken a notifiable stake in the company. In one day’s dealing last Friday his holding crossed the disclosable thresholds of 5%, 10%, 11%, 12%, 13%, 14%, 15% and 16%. By the end of the day, he owned over 33m shares — 16.7% of Forterra.

Woodford’s £70m investment is a big show of confidence in one of the leading manufacturers of building products for the UK building and construction industry. It follows Forterra’s maiden annual results as a listed company, which were released last month. The results were in line with expectations and management said that “2017 has started well, building on the momentum seen in the second half of 2016”.

The City consensus earnings forecast for the current year is for growth of 8%, taking earnings per share (EPS) to 23.2p, giving a price-to-earnings (P/E) ratio of 9.9 at a share price of 230p. The P/E is below the value threshold of 10 and a further advance in EPS forecast for next year drops it to 9. Meanwhile, a prospective dividend yield of 3.9%, rising to 4.3%, only adds to the stock’s value credentials.

Branded business parks

While Forterra is a new investment for Woodford, Sirius Real Estate (LSE: DRX) is an existing holding that he’s just pumped more cash into. This leading operator of branded business parks in Germany has a similar market cap to Forterra, being £470m at a share price of 53.5p.

Sirius notified the market this week that Woodford has increased his holding in the company from 38.3m shares to 44.9m. The purchase gives him a 5.1% stake valued at £24m, and follows a trading statement from the company earlier this month ahead of annual results scheduled for late June.

Sirius said the results are set to be in line with expectations. The City consensus is for EPS of 3.75p, giving a P/E of 14.3, which falls to 12.9 next year on forecasts of 11% EPS growth. The rating is rather higher than Forterra’s — but still reasonable — and the trade-off is that Sirius has a higher prospective yield of 4.8%, rising to 5.2%.

I can see why Woodford’s keen on both stocks and their valuations suggest now could be a good time to buy them.

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G A Chester has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended AstraZeneca and Imperial Brands. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.