Where are the best stocks to buy now? The recent market rally has lifted many shares back towards their fair value, in my view. I’m not seeing as many bargains as I was a few months ago.
One technique I like to use in this situation is to look for shares that are trading close to their 52-week lows. These have typically underperformed the market for some reason, but they may now be close to a turning point.
My latest trawl through the market has unearthed two possible bargain buys.
An affordable treat
My first choice is drinks firm Nichols (LSE: NICL), which owns the Vimto brand. This is popular in the UK, but also has a big following in some overseas markets, especially the Middle East and Africa.
Sales were hit hard by pandemic restrictions on pubs and restaurants. But the out-of-home market has largely returned to normal now. Nichols also has plans in the pipeline that management believes could deliver “significant opportunities” for higher profits.
For me, this company has two big attractions. One is that it’s a defensive business, selling an affordable product that’s bought regularly by many people.
Vimto’s strong brand has supported double-digit profit margins for many years. Until the pandemic, Nichols’ dividend had not been cut for 30 years.
The second attraction is that it’s a family business with very conservative finances. At the end of December, the company reported a net cash position of £56m — equivalent to 15% of the current share price.
Of course, there’s always a risk that Nichols’ best days are behind it and that it will continue to suffer from a lack of growth. I can’t be sure this won’t happen, especially in today’s tough economic climate.
The future is always uncertain. But on balance, I think the proven quality of this business should drive further success. In my view, Nichols shares could be a good long-term investment at current levels.
A reliable 5.5% income
My second choice is quite different. FTSE 250 property group LXi REIT (LSE: LXI) specialises in owning properties with very long leases.
The majority of the group’s portfolio is made up of budget hotels (Travelodge/Premier Inn), theme parks (including Alton Towers and Thorpe Park), private hospitals, and supermarkets.
Overall, LXi’s portfolio has 80 tenants, with a weighted average of 27 years until the first lease break, or expiry.
Management has completed some refinancing this year, which I think has reduced the risk of future problems. However, the firm hasn’t avoided missteps completely.
LXi’s share price slumped in September after the company announced a £500m deal to buy 18 Sainsbury’s supermarkets. Funding the deal would have required a sizeable share issue as well as new debt.
LXi subsequently withdrew from this deal, but the share price hasn’t yet recovered. However, three directors have bought more than £800,000 of stock since then. This suggests to me they believe the shares offer value at current levels. I agree.
A nasty UK recession could put pressure on some of LXi’s key tenants. But on balance, I think this situation looks a good bet for long-term income. With a forecast yield of 5.5%, I’m tempted to add LXi to my own portfolio.
