Why this Neil Woodford stock could help you retire early

Roland Head raves about a recent Neil Woodford pick and considers an alternative choice.

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Fund manager Neil Woodford has backed a number of new stock market flotations in recent years.

Today, I want to take a closer look at one of these companies, together with another small-cap growth stock that’s just released an interesting set of results.

A top Woodford pick?

Woodford’s heavy exposure to the UK housing market is definitely a bold move, as my colleague Harvey Jones explains here.

But Woodford Funds’ 9.2% stake in Strix Group (LSE: KETL) seems far less risky to me. Indeed, I believe this stock could be a star performer over the years ahead. Strix makes temperature controls for kettles. These components are subject to tough regulatory testing in most western markets, because of the safety risks if they malfunction.

New competitors find it hard to break into this market because Strix’s large market share and protective patents form a barrier to entry.

A long-term buy

Last year’s accounts show an operating margin of 29% on sales of £91.3m. Such a high profit margin suggests to me that the firm’s components don’t face too much price competition.

Management is now looking for new growth markets. In my view, the most exciting of these so far is a recent deal with a major US consumer goods company. This unnamed firm plans to use Strix’s technology in a new range of single-serve coffee machines.

I’m sure you don’t need me to tell you that if Strix can achieve a decent market share in coffee machines, its sales could rise significantly above current levels.

Analysts expect the group’s earnings to rise by around 4% this year, to 13.7p per share. This puts the stock on a forecast P/E of 11.8, with an expected dividend yield of 4.3%. In my view, this could be a good long-term dividend-growth buy.

A turnaround opportunity?

One recent flotation that has disappointed investors is LED lighting group Luceco (LSE: LUCE). Shares in this small-cap edged lower this morning after the firm reported a half-year operating loss of £3.1m, on sales of £75.1m.

The bad news wasn’t a complete surprise. The firm had warned in July that rising costs, destocking, and weak UK consumer confidence would hit profits. The question for shareholders is what might come next?

According to today’s report, the group expects to return to profit during the second half of the year. Chief executive John Hornby says that Luceco’s third-quarter UK retail order book is 30% higher than it was at the start of Q2.

The firm is also benefiting from a fall in the price of copper and agreements for higher selling prices. Both changes should help to restore the group’s profit margins.

Buy, sell or hold?

I can see the turnaround potential here. But I do have some concerns.

The first is that LED lighting seems to be a very competitive business. Larger peer Dialight has also seen profit margins fall in recent years. I don’t know enough about this sector to know which companies, if any, have a sustainable advantage over cheaper rivals.

My second concern is that Luceco’s net debt has now risen to £41.4m. That seems high to me for a company that’s only expected to report a net profit of about £10m this year.

The shares’ forecast P/E of 10 seems about right to me, in these circumstances. I wouldn’t buy anymore just yet.

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.

Roland Head has no position in any of the 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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