The Motley Fool

2 top ‘compounders’ trading at discount valuations

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Compounding is the process of building wealth steadily over time, as money creates more money and this process is regarded as one of the most important investing principles. 

Companies that can compound wealth year after year have been dubbed ‘compounders’ by investing gurus such as Warren Buffett and they can generate huge returns for investors over time. Warren Buffett’s Berkshire Hathaway is considered to be the world’s best compounder, having grown book value per share at a mid-teens percentage rate every year since inception.

One Killer Stock For The Cybersecurity Surge

Cybersecurity is surging, with experts predicting that the cybersecurity market will reach US$366 billion by 2028more than double what it is today!

And with that kind of growth, this North American company stands to be the biggest winner.

Because their patented “self-repairing” technology is changing the cybersecurity landscape as we know it…

We think it has the potential to become the next famous tech success story. In fact, we think it could become as big… or even BIGGER than Shopify.

Click here to see how you can uncover the name of this North American stock that’s taking over Silicon Valley, one device at a time…

But Berkshire isn’t the only company in the world that has been able to produce an enormous amount of wealth for investors by compounding.

A mission for returns 

Motor dealer Cambria Automobiles (LSE: CAMB) is on a mission to generate returns for investors. Since 2011 the company has compounded book value at a rate of 16.7% per annum as its low investment, high return model has allowed management to pay down debt and reinvest cash generated from operations into expansion.

Today the company reported interim results for the six months ended 28 February, which show a continuation of its historical performance. Rolling 12 month return on equity remains high at 22% and at the end of the period the company had net cash of £3.3m. A strong balance sheet has given management confidence to hike Cambria’s interim dividend by 25%.

However, despite these impressive performance figures, shares in Cambria trade at a discount valuation. At the time of writing, Cambria trades at a forward P/E of 8.3 and an EV/EBITDA ratio of 4.9, which is around half of the industry average. This valuation seems unwarranted because Cambria is one of the most productive public companies trading in the UK today. Only 10% of all the public companies in Britain currently produce a return on equity of more than 22%.

All in all, Cambria is one of the most profitable businesses in this country, and it also seems one of the most undervalued.

Brexit worries

Like Cambria, Staffline (LSE: STAF) has also been able to compound shareholder equity at a steady, attractive rate over the past five years, thanks to a market-leading return on equity. 

Since 2011, Staffline’s book value per share has grown at 14.5% per annum and last year the group achieved a return on equity of 19.1%. Nonetheless, despite these impressive metrics, shares in Staffline are trading at a discount valuation, a forward P/E of 10.1. 

It seems investors are worried about Staffline’s reliance on European workers and how the company will deal with this exposure during and after Brexit. Analysts appear concerned as well as, after the firm growing earnings per share by 200% during the past five years, the City is predicting earnings growth of only 1% for this year followed by 5% for 2018. 

Still, even if these forecasts prove true and growth slows to a crawl, Staffline shouldn’t lose its ability to be able to compound shareholder wealth as return on equity will remain elevated.

One Killer Stock For The Cybersecurity Surge

Cybersecurity is surging, with experts predicting that the cybersecurity market will reach US$366 billion by 2028more than double what it is today!

And with that kind of growth, this North American company stands to be the biggest winner.

Because their patented “self-repairing” technology is changing the cybersecurity landscape as we know it…

We think it has the potential to become the next famous tech success story.

In fact, we think it could become as big… or even BIGGER than Shopify.

Click here to see how you can uncover the name of this North American stock that’s taking over Silicon Valley, one device at a time…

Rupert Hargreaves owns shares of Cambria Automobiles. The Motley Fool UK owns shares of Cambria Automobiles. 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.