It is rather bold to claim to make that I know where to find stocks that have the potential to make you a million. But I firmly believe the two companies I’m going to cover today have this potential, primarily because they’ve already generated outstanding returns for investors, and I expect this trend to continue.
Take independent construction materials company Breedon (LSE: BREE) for example. Over the past 10 years, Breedon has produced an annualised return of 17% for investors, turning a simple £1,000 investment a decade ago into £5,500 today.
I see no reason why this trend can’t continue. Breedon is the largest single operator of aggregate mines and quarries in the UK, which means it is uniquely positioned to supply the country’s construction market — competitors can’t just start up a new quarry overnight. Management is using cash flow from the company’s established operations to expand into new markets, such as Ireland, and build out the firm’s presence here in the UK where it’s underrepresented.
Investing in growth
The strategy is paying off. According to a trading update issued by the company today and after acquiring Lagan Group last year (one of its most significant acquisitions to date, taking it into the Republic of Ireland), revenues for the 10 months to the end of October exploded 32%, thanks also to increases in aggregate and asphalt volumes of 21% and 45%, respectively.
Going forward, management expects demand for construction materials in the Republic of Ireland to continue to grow at a double-digit rate, offsetting the weakness in the UK.
Right now, shares in this one-of-a-kind business are changing hands for just 13.6 times forward earnings, a multiple, which in my opinion, doesn’t do the company justice.
Considering its unique position in the market, and record of earnings growth (net profit has grown at a rate of 60% per annum for the past five years), I would be willing to pay a high teens multiple to get my hands on the stock today. Management seems to agree. The group’s CEO, managing director, and several executive directors all recently splashed out to buy shares in the business. I think it could be worth following them.
Cash returns
Like Breedon, Somero Enterprises (LSE: SOM) also has an impressive track record when it comes to shareholder returns. Over the past 10 years, shares in the company have returned 40.2% per annum for investors, turning every £1,000 invested into £52,000.
Can this trend continue? I believe it can. Somero is a world leader in the production of laser-guided construction equipment, and demand for its products is only growing. But what I really like about this firm is that it’s highly profitable. Last year, is reported an operating profit margin of 29.7%, and a return on capital employed — a measure of profit for every £1 invested in the business — of 55%.
Management is returning a significant amount of profit generated from manufacturing and selling the laser-guided equipment to investors. The shares currently support a dividend yield of 6.5%, and there’s just under £21m of net cash on the balance sheet.
Considering all of the above, and with analysts expecting earnings to increase by 17% this year, I believe Somero’s valuation of 10.3 times forward earnings significantly undervalues the business, and its prospects.
