Today I’m looking at two stocks I believe could deliver big gains for long-term investors.
The first company on my list is price comparison giant Moneysupermarket.com Group (LSE: MONY). Investors seem to have fallen out of love with this stock over the last couple of years, as earnings growth has slowed.
I think this could be a mistake. Moneysupermarket’s latest accounts show that its business is more profitable than ever. Over the last 12 months, the company has generated an operating margin of 29% and a return on capital employed of almost 55%.
Such high returns mean that this business generates a lot of cash, supporting a generous dividend and growth investments.
Mortgages could be a game-changer
Moneysupermarket is working on a number of projects aimed at providing a more sophisticated service to customers in the future. One area on which the company is focusing is making it easier for customers to switch household service providers.
A second area is mortgages. This is a relatively poorly served area of the market at the moment, so I think a successful mortgage comparison service could win a lot of new customers.
The share price has fallen by 14% since I last covered this business in July. The stock now trades on a 2018 forecast P/E of 16.8, with a prospective yield of 3.8%.
I think this looks too cheap for such a profitable business, so I’ve added the shares to my buy list.
High-performance engineering
Another company that’s impressed me with its long-term vision is engineering and consultancy group Ricardo (LSE: RCDO).
This one is probably best known for its work on high-performance cars, which includes building engines and transmissions for the likes of McLaren and Bugatti. The group is also involved in racing championships including Formula One and the leading electric car series, Formula E.
Indeed, electric cars are a key area of focus for the firm, which sold two of its conventional engine testing plants last year in order to focus more heavily on electrification.
Alongside this automotive work, Ricardo does some defence work and is involved in environmental consultancy, in areas such as waste management and pollution control.
Profit from specialist skills
The group’s performance last year suggests that customers are happy with its services. Revenue rose by 8% to £380m during the 12 months to 30 June, while underlying pre-tax profit was 2% higher, at £39m.
Order intake rose strongly and Ricardo ended the year with a record order book of £288m, £40m higher than one year earlier. Shareholders were rewarded with a 6% increase in the dividend, taking the total payout to 20.5p per share.
Why I’d buy
Today’s figures tell me that this business generated an operating margin of 8.1% and a return on capital employed of 13% last year. These figures look respectable to me. Although they’re lower than for Moneysupermarket, that’s to be expected given that this business requires factories and research facilities.
Looking ahead, analysts expect earnings to rise by about 5% in 2018/19. This puts the stock on a forecast price/earnings ratio of about 14, with a prospective yield of 2.5%.
In my view, this is the kind of specialist engineering business that could keep growing for many years yet. That’s why I’d be happy to buy these shares today and forget about them for 10 years.
