At first glance Lookers (LSE: LOOK) might appear too good to miss. Not only does the small-cap carry a price-to-earnings (P/E) ratio of below 10 times for 2020. At current prices it sports a monster 6% dividend yield as well
This is a share that’s loaded with risk, though. I’ve talked before about how Britain’s car retailers face an uncertain future as Covid-19-related stress and Brexit uncertainty will likely keep demand for their big-ticket products hemmed in.
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But the outlook for Lookers shareholders became that much cloudier on Monday. The company, which is undergoing an external investigation into possible fraudulent activities, has announced that it’ll be delaying the release of its full-year results yet again. It will end its relationship with auditor Deloitte once those results are finally unpacked. The retailer expects its shares to be suspended because of this latest failure too.
There’s plenty of disconcerting news for Lookers shareholders to get their heads around, then. This is why, despite its cheap price I’d avoid it at all costs.
Another small-cap trap?
Hostelworld Group (LSE: HSW) also looks like irresistible value on paper. It carries an undemanding P/E ratio of around 15 times for 2020, sure. But it’s in the dividend arena where the leisure giant really grabs attention. At current prices its forward yield sits at 5.2%.
I for one am not prepared to take the plunge with Hostelworld, though. As one would expect, trade at the small-cap has taken an almighty whack of late. It has endured a “significant reduction of bookings from free channels” and said it expects first-quarter adjusted earnings to drop €5m as a result of the coronavirus outbreak.
Investors need to prepare themselves for a prolonged period of tough trading at Hostelworld. Lockdown measures are being rolled back across the globe but strict rules for travellers — like those that UK citizens are having to endure — are likely to remain in place for some time. The firm faces an extended period of sales pressure as the developing economic downturn cramps holidays demand too.
Safe as houses
I’d much rather try and grab some choice dividends from other UK shares. Residential Secure Income (LSE: RESI) (or ReSI) is one small-cap I’d rather buy, even if its forward P/E ratio north of 27 times is a bit toppy. I consider this premium to be a reflection of its exceptionally defensive qualities. Qualities that could prove critical in what threatens to be a tumultuous decade for the global economy.
ReSI is a real-estate investment trust (REIT) that allows housing associations and local authorities the financial means to build homes. This means that it isn’t likely to suffer from any near-term economic downturn. Organisations need to keep on building to meet the housing needs of the growing UK population. In fact, the expanding homes shortage of recent years reinforces the need for them to pursue this course.
This is why ReSI’s high paper valuation wouldn’t put me off. Besides, the company’s chunky 5.3% prospective dividend yield helps to take the edge off. I’d happily buy this share for my own shares portfolio.