Why I Would Add Portmeirion Group plc And Axe AO World plc

Portmeirion Group plc (LON: PMP) is a hot stock right now, but AO World plc (LON: AO) can only be one for the future…

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As far as hot stocks are concerned, Portmeirion Group (LSE: PMP) ought to feature on the list. The company announced this morning that it is on track to beat revenue expectations for 2015 by more than 11%.  

The homewares manufacturer, which creates fine China products from its Stoke-on-Trent factory, makes for an extremely good investment case.

First — its revenues. Portmeirion will report revenues exceeding £68.0 million.

Second — its business strategy. This is innovative and shrewd. The company did not suffer at all during the latest financial crisis. And its current revenue  level is being realised even after investing in new manufacturing facilities following Portmeirion’s takeover of British potteries in 2014.

Third — profits. If its full-year profits for 2015 will have risen in line with revenues, they are going to be to the tune of £3.99 million. Portmeirion reported a  profit of £1.8 million in the first half of 2015, and £27.9 million in revenues.  

Fourth — dividends. In line with this growth, the company is expected to raise dividends to 3% this year, analysts say. Portmeirion has never cut or withheld dividends since 1988 when it listed on the LSE in 1988, and dividends have grown 10% for the past three years.

All Portmeirion’s financial numbers over the past decade reveal that this is one very stable, dependable company with solid growth year after year. Its revenues have been at record highs for the past six years, with 2014 being its best year ever.

With good, well-covered dividends, capable management, and a share trading at a P/E of only 15.9 and no debt to speak of, what’s not to like?

AO World (LSE: AO) briefly hit the list of top risers on the LSE this morning, piggybacking on Home Retail Group’s (LSE: HOME) rally, but as frequently is the case with this stock, excitement was short-lived and unsubstantiated by volume. But I am glad it caught my attention, though, because even though I would sell this stock straight away today, I am keeping an eye on it for the long term. 

The problem with AO World is that soon after the company was floated at £4.12, it started to make a loss. Investors who bought into the issue saw their investment largely evaporate in front of their eyes weeks later as a result. Forgiveness is hard to find given that the share is currently the trading at £1.51.

In-between then and now, AO World — which pursues a high energy expansion strategy — has been faced with high start-up costs in Europe and a sharp slowdown in its normally rapidly growing sales in the fourth quarter of 2014.

Its latest trading statement, issued last week, is somewhat hopeful that this could pay off at some point. AO World managed to post a 35% rise in third-quarter revenue year-on-year. UK revenue grew by 24% vs 14% the previous year. Those figures might bode a smaller loss. 

Those are also somewhat redeeming numbers if you consider that, in the six months to 30 September, AO World reported a £8.9m operating loss (compared with a profit of £0.9m in the corresponding period in 2014), while revenue rose 21.7% year-on-year to £264.3m.

Long-term group performance remains in line with expectations, the company informed its shareholders last Tuesday. Apparently Black Friday week worked a lot of magic, which — in light of the revenue growth in the UK — does figure.

Even though I believe the share is set to explode the minute the company starts to deliver profits, given the generally strong levels of its revenue and sales growth, I am holding off at least another three months to scrutinise fourth-quarter numbers before potentially picking up a stock that could, in my opinion, turn into a money-spinner overnight.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Angelique van Engelen has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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