All shares are risky. However, my aim is to balance risk against potential reward with careful stock selection. And one theme that appeals to me right now is buying so-called reopening stocks.
The appeal of reopening stocks
The concept is easy to understand. And it needs to be for me! I reckon some of the best strategies are face-slappingly obvious. And we don’t often get extra gains from our stocks just because a strategy is complex and hard to grasp.
The idea is that some businesses have suffered because of the pandemic. And their profits and share prices have declined. Meanwhile, their locked-in customers are itching to get out and spend money again, leading to pent-up demand. As soon as lockdowns ease, out they’ll likely go to spend, spend, spend. And they’ll be using the cash they’ve been squirrelling away while being locked at home.
The prospect of surging demand and depressed share prices could lead to stock outperformance. Or, it may not. Despite the attractions of reopening stocks, nothing is a sure thing when it comes to investing. However, that’s not going to stop me from trying. And I reckon one worth consideration is the UK’s “leading” tile specialist, Topps Tiles (LSE: TPT).
The company released a first-half trading update today trumpeting “resilient performance against a challenging backdrop”. The report covers the 26-week period to 27 March. And revenue came in down by almost 2.5% year-on-year. However, there was like-for-like growth in retail sales of 2%.
But that masks the underlying picture, because in the first 13 weeks of the period, retail sales grew by almost 20%. Yet the current lockdown reversed that progress. And retail revenue declined by just over 17% in the second quarter.
Growth expected ahead
Meanwhile, within the commercial sector, the company said some industries have been “significantly” affected by the pandemic. For example, restaurants, bars and leisure areas. And Topps Tiles saw its commercial sales decline in the first half by 10%. But the directors reckon the forward-looking indicators are “positive”. The company expects to make “good progress” in the second half as the economy begins to grind back into life.
The directors expect a “sharp increase” in sales and a recovery in margins when trading restrictions lift in the middle of April. Part of their confidence is based on the company’s experience last year when the country came out of the first lockdown — customers returned in their droves. Chief executive Rob Parker said: “We have a strong balance sheet, are debt-free, and are well-positioned for growth this financial year.”
The outlook for the business is positive. However, the stock market has already noticed and the valuation isn’t cheap here. With the share price just above 70p, the forward-looking earnings multiple is just under 15 for the trading year to September 2022. And the stock has already recovered to within a whisker of its pre-coronavirus level.
Prior to that, the shares had been trending down since the summer of 2015 driven by a patchy record on earnings. Let’s not forget this business is cyclical with all the inherent risks that implies. Nevertheless, I’m tempted to buy and hold this reopening stock now for the long-term potential of the underlying business.
