My top UK share pick for January soared 39%! What now?

Christopher Ruane saw his top UK share pick for January soar 39% in a single month. Here he explains what he plans to do now.

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In December, I shared my top UK share for January. I noted that several directors had recently added to their holdings. I also observed that strong trading performance did not seem to have been fully reflected in the share price.

So, what happened next?

39% share price increase in January

The share in question is car dealership Lookers (LSE: LOOK). Over the course of January alone, the Lookers share price shot up by 39%. It has climbed by 149% over the past year.

What has caused this surge – and could it continue?

Why this UK share rose

There are several reasons behind the strong price performance in January. I think the key one is the revelation that European car sales giant Constellation Automotive, which owns brands including auction house BCA and digital sales platform Cinch, bought a 19.9% stake in Lookers.

As an existing industry player, that stake may be based more on strategic considerations than purely financial ones. But I think the swoop for a sizeable stake suggests that Constellation felt it was getting good value for money. Even now, I still think there may be further potential upside to the Lookers share price. If Constellation decides to bid for all of Lookers at some point, it may need to offer a premium to the current share price to win shareholders over. Even if Constellation just maintains its current shareholding, I think the strong business outlook for Lookers could drive up revenues and profits. On top of that, the company has already signalled to the market that it plans to restore its dividend this year. That could boost the Lookers share price further.

There could be risks ahead, too. For example, difficulties in the car supply chain might lead to stock shortages hurting revenues and profits. Rising petrol prices are adding to fleet operators’ costs. So they may drive a harder bargain when it comes to buying vehicles. That could hurt Lookers’ profit margins. But for now I continue to see possible upside to the Lookers share price. I would still consider adding it to my portfolio even after January’s price surge.

What I am considering in February

Nobody knows what will happen next in stock markets. But the reasons I felt Lookers was a UK share that might rise in January were there for anyone to spot, in my opinion.

For example, like other listed companies, Lookers is required to publish details of directors’ purchases or sales of its shares. Just because a chief executive buys 100,000 shares, as happened at Lookers in December, does not necessarily mean a company is undervalued. But in general I regard substantial director purchases as suggestive that, with expertise in the industry, the executive sees a share price as cheap. I already thought that about the Lookers valuation. It had reported a sharply improving business outlook. Its established dealer network and brand give it a competitive advantage. Its property portfolio alone was valued higher than the company market capitalisation at the start of January. So the chief executive’s share purchase was one more data point in my thought process.

I am thinking now about what moves to make in my portfolio in February and beyond. But I will keep applying the same analytical approach which led me to Lookers.

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 considered so you should consider taking independent financial advice.

Christopher Ruane 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.

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