Let me show you how naive I was when I first started my investing journey many (many) moons ago. I used to believe UK shares only came in the form of blue-chip giants, and household names. I quickly learnt that this was not the case! In fact, so-called lesser-known stocks could be better investments.
Two options I reckon investors should be considering are Somero Enterprises (LSE: SOM) and Mitie Group (LSE: MTO). Here’s why!
Somero Enterprises
The business designs, assembles, and sells patented laser-guided equipment to help with spreading and levelling concrete. Hardly riveting stuff, let’s be honest. However, there’s a multitude of applications that I can think of. These include house building, roads, all types of construction.
I must admit I was initially drawn to the stock by its forecast dividend yield of 6%. This is higher than the FTSE 100 average of 3.9%. However, I do understand that dividends aren’t guaranteed.
Furthermore, an enticing valuation on a price-to-earnings ratio of just 11 is attractive.
The firm could capitalise and boost earnings when infrastructure and house building activities surge post-economic malaise. Now could be a good entry point, in my eyes. A healthy balance sheet is vital for the firm, as it is a smaller business, with a market cap of close to £200m. As a rule of thumb, smaller businesses are prone to more volatility.
From a bearish view, Somero is at the mercy of cyclical headwinds. A bit like now, when building, construction, and similar activities are subdued due to volatility, there is the potential for performance and payouts to dip. This could result in a less-than-stable journey of growth and payouts.
Mitie Group
There’s a very good chance you’ve experienced Mitie’s facilities management prowess when utilising a public service, like a hospital, for example. Some of its services include management, maintenance, and more.
It would be remiss of me not to mention Mitie’s struggles during the pandemic period. This resulted in poor performance and a shaky financial situation. The good news is that recent trading, and a turnaround in fortunes has resulted in a much healthier cash position, with a good footing to have a good crack at growth moving forward.
Personally, Mitie’s energy infrastructure services could be where exciting growth could come from. The business is helping its vast client base with their net-zero ambitions. This could be a money spinner in the future as the green revolution ramps up.
At present, the shares trade on a price-to-earnings ratio of 14. This is lower than the industry-average ratio of just over 17.
Looking at risks, I have one main gripe that could impact Mitie negatively. The business employs thousands of people across its sprawling operation. Any potential rise in wages – linked to the current economic situation – could have a serious impact on profitability. This could dent investor sentiment, as well as any future returns.
On another note, competition in the industry is intense, especially with a lack of barriers of entry into it. However, although this can squeeze margins, I’m not too concerned. This is primarily due to Mitie’s long track record, and existing reputation and relationships.
