A sub-10 P/E ratio and 9% dividend yield! Is this stock a great buy for your ISA?

Royston Wild looks at a monster yielding share and considers whether it’s a top buy for those with Stocks and Shares ISAs.

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Image source: Getty Images.

Lookers (LSE: LOOK) saw its share price fall through the floor in 2019. It suffered an eye-popping 39% plunge as the UK retail sector struggled and sales of new cars in  particular took a whack.

Data released this week from the Society of Motor Manufacturers and Traders (SMMT) underlined just how difficult conditions were for the country’s car retailers last year. Just 2.3m new cars hit the road in 2019, down 2.4% year on year and the lowest number for six years.

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However that same release suggested that conditions have improved more recently, the SMMT noting that there were 3.4% new units sold in December versus the same month in 2018. Could now be the time to buy into Lookers, then?

Time to buy?

The motor dealer certainly looks compelling on paper. City brokers are forecasting that the business will bounce back from another profits drop in 2019 with a 16% rise in the newly-minted year.

This leaves the small cap dealing on a bargain-basement price-to-earnings growth (or PEG) multiple of 1. However, it’s not just growth and value investors who might be tempted by the auto retailer as a forward dividend yield of 4.2% gives income chasers plenty to cheer too, a reading that beats up the corresponding average of 3.3% for the UK’s mid-caps.

In my view, though, Lookers is a risk too far, despite these compelling readings. The prospect of sustained political and economic uncertainty through to the end of 2020 at least, allied with ongoing pressures on the diesel market, makes it difficult to envision a profits rebound any time soon, at least in my mind. I think it’s a share that’s still best avoided.

9% dividend yields!

Could McColl’s Retail Group (LSE: MCLS) be a better destination for your cash today? It would seem a logical assumption as spending on groceries during difficult economic times always holds up better than expenditure on big-ticket items like cars.

In fact, convenience store operator McColl’s seems to be a superior stock pick in plenty of respects. Predicted earnings growth for the current financial year (to November 2020) comes in at a giant 19%, resulting in a rock-bottom P/E ratio of 6.2 times.

What’s more, City analysts expect annual dividends at the groceries play to keep ripping higher. Thus the forward yield rings in at a whopping 9%.

More shaky data

In my opinion, though, McColl’s still remains an unattractive pick right now as food shoppers keep a tight lid on spending and intense competition increases the top-line strain.

These themes were evident in latest trading numbers from Morrisons today. Like-for-like sales were down 1.7% in the 22 weeks to January 5, the FTSE 100 firm declaring that “trading conditions remained challenging and the customer uncertainty of the last year was sustained.” Incidentally, Morrisons said that wholesale revenues were dented because of weak sales at McColls in the period, adding to the intense sales pressure felt by its supermarkets.

McColl’s is cheap, but it’s cheap for a reason, its share price dropping 32% in 2019. And I reckon the prospect of more painful drops this year makes it another stock that’s best avoided.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended McColl's Retail. 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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