Many UK stocks have been chopping about during the summer without making much progress higher.
Some have shot up and some have plunged, but most have been treading water. However, that doesn’t mean there’s no petrol left in the tank!
Potential for stocks to surge
Sometimes the market needs to rest a while before lurching higher, and this may be one of those times.
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The businesses behind UK stocks haven’t been sleeping. They’ve still been trading, cranking up revenues, earnings and cash flow.
The situation feels just like a pressure cooker sitting on a hot stove. Something will have to give if valuations are to be maintained in the face of improving business fundamentals.
When this thing blows, hold on to your hats!
Many UK stocks now look exciting, and there are several I love right now.
For example, Norcros (LSE: NXR) is attractive as a cyclical recovery and growth play trading on a modest valuation.
The company provides bathroom and kitchen products with operations in the UK, Ireland and South Africa.
It’s known in the UK and Ireland for its Triton shower brand, and it also trades with the names Merlyn, Grant Westfield, VADO, Croydex, and Abode.
Trading well and a positive outlook
Back in July, the company issued an upbeat statement. First-quarter trading had been “resilient”, and expectations for full trading year to March 2025 were unchanged.
Chief executive Thomas Willcocks said conditions had been challenging, but Norcros had outperformed, suggesting the business had been winning market share.
Willcocks reckons the good progress was because of favourable positioning and the ongoing execution of the company’s growth strategy.
However, the firm operates in very cyclical sectors and that adds a layer of risk for shareholders. If economies turn down again or some other shocks happen to the economic system, it’s likely Norcross will see falling revenues, earnings and cash flows.
If a situation like that beds in, the share price and dividends will likely join the race to the bottom. Get the timing wrong, and it will be easy to lose money on Norcross shares.
The volatility is evident in the chart and in the firm’s financial record.
Nevertheless, cyclicality works both ways and I’m optimistic about the potential for Norcross to see a thriving business in the coming years.
City analysts have pencilled in double-digit percentage advances for earnings this year and next, and steady progress with the dividend.
A modest valuation
With the share price near 232p, and set against those expectations, the forward-looking earnings multiple for next year is running at just below seven. And the anticipated dividend yield is almost 4.5%.
I see that valuation as undemanding and would be keen to dig into this business with further research right now. I see it as a potential candidate for a diversified long-term portfolio.
However, I also like James Latham, the trade distributor of timber, panels, and decorative surfaces, and telecoms company BT.
Both those stocks strike me as having strong potential if the economy continues to improve. But just like Norcros, they’re also vulnerable to the negatives when economies turn down.
Nevertheless, on balance, and despite the risks, I love all three of these UK stocks right now.
