I’ve been avoiding many UK-facing stocks in the most highly cyclical sectors for the last few years. However, in an article about Barclays yesterday, I suggested some of these stocks have finally reached such a cheap valuation that I think the time could be ripe to start buying for the long term.
One of the most prominent on my radar is FTSE 250 property group NewRiver REIT (LSE: NRR). Here, I’ll explain why I think the company’s business is more attractive than some of its peers, how it meets my criteria of compelling value, and two other significant factors that inform my positive view on the stock.
Mid-cap status maintained
Earlier this week, NewRiver escaped being demoted from the FTSE 250 index by the skin of its teeth. It actually featured on the FTSE’s indicative list of demotees published on Monday. However, its shares rose enough to get its head back above water by the all-important close of market on Tuesday, and it avoided plunging into the FTSE SmallCap index.
The reason its shares rose on Tuesday was a timely and positive update on acquisitions and disposals. It also announced it’s holding a Capital Markets Day for analysts and institutional investors on 26 September.
Positioned for growth and resilience
NewRiver specialises in buying, managing, developing and recycling convenience-led, community-focused retail and leisure assets throughout the UK. Its £1.3bn portfolio consists of 33 community shopping centres, 23 conveniently located retail parks and over 650 community pubs.
Management has deliberately focused on the fastest growing and most sustainable sub-sectors of the UK retail market, with grocery, convenience stores, value clothing, health & beauty and discounters forming the core of its retail portfolio. It’s deliberately limited exposure to structurally challenged sub-sectors such as department stores, mid-market fashion and casual dining.
I like how NewRiver’s positioned itself, not least because I think its retail centres should be more resilient than some of its peers in an economic downturn, as should its pubs, which traditionally offer an affordable treat when consumer incomes are squeezed.
Woodford and shorts
I reckon NewRiver’s share price has suffered from the general aversion to property in this time of Brexit fears, but also because of the two other significant factors I mentioned earlier.
Back in April, Neil Woodford had a 29% stake in NewRiver. However, with redemptions at his Equity Income fund spiralling dangerously out of control, he was forced to sell liquid stocks. By mid-July his NewRiver holding went below 5% and I suspect he’s exited completely by now.
At the same time, short positions in NewRiver (hedge funds betting on its share price falling) peaked at over 8% in June, but are currently down to less than 5%.
The depression of NewRiver’s share price has left it sporting what I think of as the four aces of value investing. It’s trading at a deep discount to its book value (35%), on a cheap forecast earnings multiple (8.3x), with a high dividend yield (12.7%), and has a strong balance sheet, including fully unsecured borrowings with long maturity dates (August 2023 and March 2028).
I think NewRiver’s positioning in value retail and pubs, the clearing of the Woodford overhang, the reduced short positions, and my four aces of value, suggest now could be an opportune time to take an interest in the stock for the long term. I rate it a ‘buy’.