This share led the FTSE 100 on Tuesday. Here’s why I’d buy it for my 2021 ISA

Here’s a stock beating the FTSE 100 hands down during the Covid-19 crisis. I reckon it has many more years of outperformance ahead of it.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Ashtead Group (LSE: AHT) posted first-half results Tuesday. In response, capping an excellent year so far, the Ashtead share price jumped 6% in early trading. By mid-afternoon the rise stood at 4%, with Ashtead leading the FTSE 100 index on the day.

2020 is a year that most investors might prefer to forget. But Ashtead shareholders have had a terrific time. Despite the Covid-19 pandemic knocking most shares for six, Ashtead is up 40% year-to-date, way ahead of the Footsie’s 13% loss.

Ashtead shares initially fell harder than the FTSE 100 in the early days of the pandemic. But they’ve since come storming back in one of the recovery stories of the year. Those who managed to buy right at the bottom have trebled their investment in as little as nine months. It’s all exciting stuff from an equipment rental firm, something we might normally expect to be dull as ditchwater.

Enviable FTSE 100 result

Ashtead put in a strong second quarter, resulting in underlying revenue falling just 4% over the six months to 31 October. EBITDA fell by a very modest 7%. Underlying EPS did drop 19%. But the 89p earned per share is still very healthy, and something most FTSE 100 companies can really only dream of in 2020.

On the balance sheet front, things are looking very impressive. Ashtead reported record free cash flow of £822m. And its net debt to EBITDA ratio is coming down, to 1.7 times from 1.9 times a year previously. The interim dividend is maintained at 7.15p per share.

What’s the secret of Ashtead’s success? Chief Executive Brendan Horgan put it down to “the successful execution of our long-term strategy, which we embarked upon after the last recession, to broaden and diversify our end markets and strengthen our balance sheet.”

He added that “we now expect full year results ahead of our previous expectations.

Be prepared

Successfully negotiating a market downturn is all in the preparation. Too many FTSE 100 companies borrow their way to growth during healthy times, piling up debt and leaving nothing in reserve. Then when a crunch hits, they’re in trouble. That’s why I’m increasingly looking first to a company’s debt situation whenever I plan an investment.

It’s a bit like the stress tests our FTSE 100 banks have to undergo every year. I’m not too interested in how a company is managing its balance sheet during the good times. No, I want to see enough strength there to convince me it can handle a market slump without any real problems. Ashtead satisfies me on that score easily.

For the 2021–22 year, forecasts suggest a P/E of 19.5, which might seem a bit high. But Ashtead’s strategy has produced years of double-digit earnings growth. I expect more to come, and I rate the P/E as fair value.

Oh, and Ashtead has a progressive dividend policy too. The yield is only around 1.5% now, but the prospect of long-term growth ahead of inflation makes it attractive to me. I rate Ashtead a long-term ISA buy.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

More on Investing Articles

Investing Articles

Should I sell my FTSE All-Share index fund and buy a S&P 500 tracker instead?

Harvey Jones is wondering whether now is a good time to invest more money in the S&P 500, after a…

Read more »

Investing Articles

Should I buy dirt-cheap BT shares after the recent pullback?

BT shares were on the up but now they're sliding again after the board trimmed full-year guidance. Now Harvey Jones…

Read more »

Investing Articles

Up 28%, can the easyJet share price keep rising?

The easyJet share price has gained altitude over one year but plunged over five. Is now an attractive time for…

Read more »

British Isles on nautical map
Investing Articles

Should I buy more BAE Systems shares at 1,350p?

BAE Systems shares have had a fantastic run since early 2022, yet still don't appear overvalued. Is it now time…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

7% yield and a cheap valuation! Is this one of the best shares to buy this month?

Christopher Ruane has been looking for cheap shares to buy. This one has a 7% dividend yield, so is it…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

Should I buy National Grid shares for the big dividend before it’s too late?

This year's price weakness has left National Grid shares on what looks like a tempting valuation. I hope it doesn't…

Read more »

Investing Articles

There are now 5,000 ISA millionaires! See the surprising UK dividend shares they’re buying

The number of ISA millionaires is growing all the time and guess what? They're really into blue-chip dividend shares listed…

Read more »

Blue NIO sports car in Oslo showroom
Investing Articles

Down 38% in weeks! Time to snap up NIO stock?

NIO stock's more than doubled in value over the past five years but has been on a wild ride lately.…

Read more »