The Motley Fool

Why this 14% yielder is still on my buy list today

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.

Dice engraved with the words buy and sell, possibly in FTSE 100
Image source: Getty Images.

Investing in a successful turnaround can be very satisfying as it often allows you to lock in a high yield and enjoy generous capital gains.

As a value investor, I’m often tempted by turnaround stocks if I feel that the company’s cash flow and balance sheet are strong enough to allow a recovery.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic… and with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. And if you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio.

Click here to claim your free copy now!

A classic contrarian buy?

One of the more extreme situations in the market at the moment is logistics specialist Connect Group (LSE: CNCT). This Swindon-based firm’s main business is the delivery of newspapers to shops each morning. It also owns parcel firm Tuffnells.

Connect shares have slumped from 143p to 66p over the last year and recently crashed 28% in one day following a profit warning.

I held the shares before the profit warning and decided to average down afterwards. Although the expected shortfall in profits this year is disappointing, the fall in the share price has been much greater than the expected shortfall in profits.

This business is still profitable and highly cash generative. I believe this should give management the breathing space they need to develop new sources of growth.

Is a 14% yield possible?

Anything connected to the traditional newspaper business is extremely out of favour at the moment. Valuations are very depressed — Connect stock currently trades on a forecast P/E of 4.7, despite having cut its debt levels significantly last year.

This ultra-low valuation means that the group’s forecast dividend yield has risen to more than 14%. That’s clearly a signal that the market expects profits to fall, with the dividend likely to be cut or suspended.

I agree that further problems are quite likely. I wouldn’t take a large position in this stock. But if management can stabilise profits and find a route back to modest growth, then the shares could re-rate strongly, providing attractive gains from current levels.

Should you buy this retailer?

It’s no secret that high street retailers are finding things tough. A good example is men’s formalwear specialist Moss Bros Group (LSE: MOSB).

This company warned in January that full-year profits were likely to be “slightly below current market expectations”. The shares have since fallen by 22%, even though this is only expected to be a small miss.

What’s worrying the market, in my view, is that Moss Bros sales appear to have fallen off a cliff in December. The company said that like-for-like sales rose by 1.2% from August to November, but then fell by 8% in December.

That’s a remarkable decline. It suggests to me that there’s some underlying problem. No information was provided on what this might be, but management did say it also expects 2018/19 profits to be lower than anticipated.

I’m staying away

Moss Bros’s saving grace is that it has a strong balance sheet. Net cash was £21m at the end of July, which is equivalent to around 30% of the group’s £70m market cap. We don’t know how this may have changed during the second half, but this cash should mean that management can afford to invest in the business without financial constraints.

However, men’s fashion is always a difficult area. Until the company provides more information about the problems it’s facing and how they will be addressed, I plan to stay away from this stock.

Is this little-known company the next ‘Monster’ IPO?

Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.

Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.

The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.

But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.

Click here to see how you can get a copy of this report for yourself today

Roland Head owns shares of Connect Group. 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.

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.