Best shares to buy: why I’d snap up this small-cap   

An upgrade in expectations means this could be one of the best shares to buy for good value, a fat dividend and useful diversification in my portfolio.

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With its market capitalisation near £365m, Origin Enterprises (LSE: OGN) is a FTSE AIM small-cap stock. However, not all small companies operate risky, unproven businesses models or operate with seat-of-their-pants finances. And this one could be one of the best shares to buy now.

The company runs an international agri-Services business. And it provides specialist agronomy advice, crop inputs and digital agricultural solutions to farmers, growers and amenity professionals.

Why I think it’s one of the best shares to buy

The stock could offer a useful diversifying position in my long-term portfolio. The food sector is attractive to me because of its stable characteristics. Demand in the sector doesn’t tend to vary much with economic conditions. That’s unlike the way cyclical enterprises suffer famine and feast conditions depending on whether the wider economy is booming or busting.

Perhaps the biggest set of general threats to agricultural markets is the possibility of biblical-style plagues, droughts, floods, and other natural disasters. And as I write this from the middle of a global pandemic situation, it’s clear that anything is possible.

But I like several things about Origin Enterprises. For example, the business has been trading profitably for several years. The valuation looks modest and there’s a big shareholder dividend to collect.

There are also some things I’m not keen about. For example, earnings and dividends have been volatile and the pandemic hit them hard. And the share price has been on a broad downwards trend since early 2015, although it’s up today on the release of the third-quarter trading update.

The figures are quite steady. Compared to the equivalent period a year earlier, total constant currency revenue rose by 1.7% in the three months to 30 April. And in the company’s trading year to date, constant currency revenue came in 0.8% higher.

Expectations upgraded

However, the best news is the directors’ outlook statement. They expect full-year adjusted diluted earnings to come in between 34 cents per share and 36 cents per share (the firm reports in euros). That’s an upgrade in expectations from around 26 cents. And there’s nothing like an ‘ahead of expectations’ statement to give a share price buoyancy.

The directors described the “seasonally important” third-quarter performance of the business as “satisfactory”. This was considering, they said, the adverse effects of prolonged cold weather on farm activity across Europe. Looking ahead, there’s been a “positive” start to the fourth quarter, helped by more settled weather conditions in the firm’s core markets.

So, all in all, a reassuring update from Origin Enterprises and I see it as one of the best shares to buy. Meanwhile, with the price near 348 euro cents, the forward-looking earnings multiple for the trading year to July 2022 is just over eight. And the anticipated dividend yield is just below 5%. Other value characteristics I like include a price-to-free-cash-flow ratio of around four and a price-to-book value near 1.4.

I could be wrong about the long-term potential of this business and its stock and could easily lose money on my investment. Nevertheless, I’m tempted to embrace the risks and add the share to my diversified portfolio today.

We’ll find out more about how the business is going with the full-year results report due on 29 September.

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.

Kevin Godbold has no position in any share 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.

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