This dividend, value and momentum stock could crush an outperforming FTSE 100

This tempting little stock looks set to outperform the FTSE 100 index (INDEXFTSE: UKX).

| More on:

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.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I’m bullish on the prospects for the FTSE 100 over the next few years and believe it could be a good idea to invest in a fund that tracks the index. And even better if you select one that automatically reinvests dividends along the way.

Is there a multi-year bull run on the way?

Some believe that the index is set up for a multi-year bull run after around two decades of consolidation. I think that’s a reasonable theory. Last decade’s credit-crunch was a blow that left the world’s economy and financial system in a big hole that has proved difficult to climb out of. Leading up to the crunch, many firms and individuals were engaged on a spending spree fuelled by borrowings. The world seemed to be living above its means and I see the credit-crunch as the leveller that rebased expectations. I reckon it makes sense that the world’s economy and financial system would take a decade or so to ‘repair.’ But now that the healing process is advanced, why shouldn’t we move into an extended period of prosperity and growth?

If we do, I think the FTSE 100 will do well. Many of the firms in the index operate in cyclical sectors such as finance, mining, oil & gas, retailing, housebuilding, construction and outsourcing. Macroeconomic wobbles tend to make cyclical companies’ share prices wobble too, so we often see big swings in the index. Yet the possibility of a period of prosperity suggests the potential for the cyclicals to shine and drive the index higher along with other firms in the index as their businesses grow.

Although I’m bullish about the FTSE 100, I’m even more bullish about the prospects for consumer products supplier Norcros (LSE: NXR). The firm scores well against value, quality and momentum indicators, pays a big dividend and could rally from here to outpace the FTSE 100, perhaps driven by a valuation re-rating and decent forward growth projections.

Good trading and a low-looking valuation

Today’s full-year results are encouraging. Constant currency revenue rose 8.6% compared to the prior year, underlying operating cash flow increased 4% and underlying earnings per share moved 6.1% higher. The directors expressed their confidence in the outlook by pushing up the total dividend for the year by 8.3%.

The firm supplies items such as showers, shower enclosures, trays, taps, tiles, bathroom furnishings, accessories and adhesives, and owns brands such as Triton, Merlyn, Vado, Abode, Johnson Tiles and Norcros Adhesives. During the trading year to 31 March, the firmed earned 55% of its operating profit in the UK and 45% in South Africa. There’s no doubt that operations are cyclical, but just as a period of prosperity could drive up the FTSE 100, I think Norcros could thrive too.

The stock is perky today, up around 7% as I write. But even at 213p or so, the forward price-to-earnings rating for the year to March 2020 sits below seven and the forward dividend yield is a tempting-looking 4.2%. On the face of it, there’s plenty of room for a valuation uprating and I think the stock is well worth your further research time.

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.

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended Norcros. 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.

More on Investing Articles

Investing Articles

Empty Stocks and Shares ISA? I’d snap up these 3 stocks to start with!

Sumayya Mansoor explains how she would start to build wealth from scratch with an empty Stocks and Shares ISA and…

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

7.7% yield and going cheap! Why is this unknown FTSE 250 stock flying?

It's no household name, but there's one FTSE 250 stock with a high dividend yield and booming profits that looks…

Read more »

Photo of a man going through financial problems
Investing Articles

I’d stop staring at the Nvidia share price and buy this FTSE 100 stock instead

This writer reckons there is a smarter way to invest in Nvidia today without taking on stock-specific risk. Here is…

Read more »

Young lady working from home office during coronavirus pandemic.
Top Stocks

5 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Young Asian man drinking coffee at home and looking at his phone
Dividend Shares

These 3 FTSE 250 stocks offer me the highest dividend yields, but should I buy?

Jon Smith considers FTSE 250 shares with a very high yield, but questions whether the income is going to be…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Is FTSE 100 takeover target DS Smith a great buy?

A mega-merger between FTSE 100 giants DS Smith and Mondi has the City abuzz. But is there any value in…

Read more »

Young Black man sat in front of laptop while wearing headphones
Investing Articles

The WPP share price dips as profits fall. Here’s why it could be a top dividend buy

I'm starting to think the WPP share price undervalues the stock, especially if the long-term dividend outlook comes good.

Read more »

Black father and two young daughters dancing at home
Investing Articles

A £3K investment buys me 632 shares in 2 stocks for a second income!

This Fool explains how a second income is possible through dividend-paying stocks and details two picks that could help her.

Read more »