2 stocks to watch in May

Bilaal Mohamed identifies two undervalued stocks that could deliver substantial gains in the coming months.

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Last month, Robert MacLeod, Chief Executive of Johnson Matthey (LSE: JMAT), was given the special privilege of opening the market at the London Stock Exchange, along with some of the company’s employees who were also invited to the event. The reason? The UK’s largest publicly-traded chemicals firm is this year celebrating its 200th anniversary.

Brand identity

In fact, the multinational giant is using the occasion to make some organisational changes and launch a refreshed brand identity. Believe me, in an age obsessed with image and perception, brand identity is of vital importance for large corporations, no matter how rich their heritage.

The London-headquartered firm likes to think of itself first and foremost as a science-led company which has a major positive impact on people’s lives, by making the world cleaner and healthier. Around a third of all new cars on the planet are fitted with catalysts manufactured by the group’s Emission Control Technologies Division. And more than 90% of sales come from technologies that have an environmental, health, or sustainability benefit, so few would be foolish enough to argue.

Environmental awareness

But Johnson Matthey is much more than just a world-leading catalytic converter business. The group also specialises in precious metal products, fine chemicals, and process technologies, with operations in 30 countries around the world. The chemicals giant has been a constituent of the blue-chip FTSE 100 index since 2002, and in that time has delivered exceptional earnings growth year-on-year.

The group’s strong performance hasn’t gone unnoticed by investors, driving up the share price from just 671p in 2008 to today’s levels of around 3,000p. But I’m in no doubt that there’s plenty more to come from the group, with the catalytic converter business extremely well placed to profit from increasing global environmental awareness. With the share price retracing to a 10-month low, and a not-too-demanding P/E rating of 13.8, now could be a good time to buy a slice of this dependable business.

Strong order book

Another London-listed firm that I believe has presented a buying opportunity due to recent share price weakness is Kier Group (LSE: KIE). The Bedfordshire-based building and civil engineering contractor has just seen its share price pull back from 12-month highs of 1,503p in March to today’s levels of around 1,340p. In my view this is just a temporary retracement before the stock continues to forge ahead. But why am I so optimistic?

In its most recent half-year report, the FTSE 250-listed construction group reported a 4% increase in underlying operating profit and an improvement in margins. The results highlight the firm’s continued progress consolidating its leading positions in the regional building, infrastructure and housing markets, all of which have a good pipeline of opportunities. These markets now account for 90% of the group’s turnover.

Kier has a very strong order book of approximately £9bn reflecting strong pipeline conversion in regional building and highway services. Forecast revenue in the Construction and Services divisions is 100% secured for the year to June 2017, with around 70% secured for fiscal 2018. Kier trades on a relatively modest valuation at 12.5 times earnings for the current year to June, falling to 11.2 for FY2018.

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.

Bilaal Mohamed has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

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