With the economic outlook uncertain, is now a good time to buy shares? For investors with a long-term view, I think it could be.
Buying good companies that are out of favour can be a great way to beat the market over longer periods. I’ve certainly been adding to my own holdings over the last few weeks.
One company I think could offer good value for income investors is over-50s insurance and travel group Saga (LSE: SAGA).
The Saga share price is currently trading close to all-time lows, following a profit warning in December 2017. But the firm’s performance has remained stable since then and chairman Patrick O’Sullivan spent about £160,000 buying Saga shares last year. That could be a good sign.
Look under the bonnet
The company’s latest financial results seem fairly reassuring to me. During the first half of last year, the group’s adjusted operating cash flow was unchanged at £89.5m, while net debt fell by 7% to £430m. Although underlying pre-tax profit fell 3.7% to £106.8m, this was expected and was partly due to an increase in spending on new customers.
This seems to have worked — the number of motor and home insurance customers rose by 19% during the period, reversing the falls seen since early 2017.
Loyalty rewards
Saga’s goal is to increase customer loyalty and sell multiple products to the same household. If the firm can develop a loyal customer base who buy travel and insurance products, profit margins should improve.
The shares currently trade on just 8 times 2018 forecast earnings, with an 8.7% dividend yield. This valuation suggests that investors aren’t expecting much progress from Saga over the next few years.
I think this view may be too cautious. If I’m right, the shares should be a good buy at current levels.
A better choice for growth?
Insurance companies are generally a better choice for income than growth, in my experience.
If you’re looking for a business with serious growth credentials, the UK’s “leading bakery food on-the-go retailer,” Greggs (LSE: GRG) could be worth considering.
The Greggs share price rose by 7% this morning, after the company said that sales climbed 7.2% in 2018 and upgraded its profit guidance again.
Back in July, boss Roger Whiteside said that underlying pre-tax profit for 2018 was likely to be unchanged from 2017, at about £82m. In November, this guidance was increased to “at least £86m.” In today’s statement, Whiteside upped this figure to “at least £88m.”
Proven performer
Greggs has a track record of strong growth, backed by solid financial performance. The firm consistently generates a return on capital employed (ROCE) of more than 20%, indicating that for every £1,000 invested in the business, operating profit increases by more than £200.
Businesses with a high ROCE usually enjoy strong cash generation, which can be used to fund expansion and pay dividends without needing much debt. It’s a powerful formula that’s helped Gregg’s share price to rise by 320% over the last 10 years.
Today’s surge has left the stock looking fully priced to me, on about 20 times 2019 forecast earnings. I’d be tempted to wait for the next market dip before buying again, but I’d certainly continue to hold this stock if I was a shareholder.
