I think these ‘nearly’ penny stocks could deliver excellent returns in the near term and beyond. Here’s why I’d buy them both for my portfolio today.
Tough times
UK share investors like me need to be on guard as economic conditions worsen. One way I can protect myself is to buy counter-cyclical stocks for my portfolio. These are shares that do well when times get tough.
One that I have my eye on today is insolvency specialist Begbies Traynor Group (LSE: BEG). Latest economic projections from the Bank of England (BoE) suggests that demand for its services could spike.
On Thursday, the BoE said it expects Britain’s economy to contract in the final quarter of 2022 as inflationary pressures persist. It also dismantled its growth forecast of 1.25% for next year and said that it expects GDP to contract 0.25%.
Threadneedle Street thinks that conditions will remain tough in 2024 as well, with the economy growing just 0.25% then. It had previously tipped growth of 1%.
Business picks up
The number of insolvencies in the UK is already accelerating at a rapid pace. According to the Office for National Statistics, corporate insolvency numbers reached 2,114 in March. This was more than double the 999 recorded a year earlier.
These increasing difficulties for businesses are already filtering through to Begbies Traynor. It said in February that trading in the previous three months was “significantly ahead of last year”. And it predicted that business would pick up from March when financial assistance from the government ended.
A cheap ‘nearly’ penny stock
I don’t believe that Begbies Traynor’s share price of 116.4p reflects its robust earnings prospects for the short-to-medium term. And I don’t think it reflects the future benefits that its highly-successful growth strategy built around acquisitions will likely deliver either.
At today’s prices, Begbies Traynor changes hands on an undemanding forward price-to-earnings (P/E) of around 12.4 times.
Expanding for growth
Begbies Traynor’s commitment to acquisitions has delivered a long record of annual earnings growth. Pleasingly, the business has significant balance sheet strength to keep the acquisitions coming too (it had £1.2m of net cash on the books as of October).
There’s no guarantee that future acquisitions will deliver anticipated rewards. Problems like disappointing revenues and unexpected costs can be commonplace. However, Begbies Traynor’s strong track record on this front gives me reason to be confident.
Dividends keep rising
I also like this cheap-to-buy stock because of its decent record of dividend growth. Begbies Traynor is expected to have grown shareholder payouts for a fifth consecutive year for the period just passed (to April).
And City analysts expect further meaty rises in this new financial year and in fiscal 2023 too. This results in strong yields of 3.1% and 3.4%.
Begbies Traynor might be a particularly good dividend growth stock for me to buy as the worsening global economy could badly hit dividends at other UK shares.
A FTSE 100 stock to buy
The cost of living crisis meanwhile creates possible problems for housebuilders like Taylor Wimpey (LSE: TW).
It’s not just that mortgage providers are revising their lending criteria in response to the inflationary pressure. It’s that the BoE is raising interest rates to curb the problem of soaring prices, hitting buyer affordability still further.
Last week, the BoE raised interest rates to their highest since 2009 at 1%. And analysts are expecting more hikes in the months ahead. The experts at ING Bank for instance think rates will rise 0.25% in both June and August.
Another brilliant bargain
This is a threat that owners of housebuilding shares like me need to take seriously (I actually own Taylor Wimpey stock along with Barratt Developments right now). But it’s also a danger I think could be baked into the share prices of most of London’s listed homebuilders.
Taylor Wimpey right now trades at just 126.8p per share. This leaves it trading on a forward P/E ratio of 6.7 times.
Strong statements
The past is of course no reliable indicator as to what to expect. But, so far, I’m encouraged by the resilience of the UK housing market even as the cost of living crisis has exploded and interest rates have risen.
Barratt Developments said on Thursday it continued to see “strong demand” for its homes between 1 January and 1 May. Net private reservations per active outlet per average week rose to 0.93 from 0.83 a year earlier. And forward sales leapt to £4.4bn from £3.7bn previously.
This follows Taylor Wimpey’s April statement in which it said it has also enjoyed “continued strong customer demand”. It also said that historically-low interest rates and an attractive mortgage product market had kept homebuyer interest healthy.
7.6% dividend yields!
I particularly like ‘nearly’ penny stock Taylor Wimpey on account of its huge dividend yields. Like Begbies Traynor, Taylor Wimpey is expected to grow dividends over the next couple of years at least. And so yields here sit at a mammoth 7.2% and 7.6% for 2022 and 2023 respectively.
Investing theory suggests that a firm with high yields and low earnings multiples might be a dividend trap. But I think there’s a good chance that Taylor Wimpey will be able to pay dividends around broker estimates even if homes demand cools and profit forecasts miss.
The housebuilder is an exceptional cash-generating business. This is reflected in its £150m share buyback plan announced in March to return excess capital to shareholders.
Furthermore, Taylor Wimpey also has excellent dividend cover over the next couple of years. Predicted dividends through to 2023 are covered just above the widely-regarded security benchmark of 2 times.
