While 2024 has been a good year for UK shares, some have fared better than others. And a couple of high-quality stocks are close to year lows at the moment.
Sometimes a falling stock can be a sign of a business with a permanent problem. But when shares in a quality company trade at an unusually low price, investors should take a closer look.
Croda International
Chemicals company Croda International (LSE:CRDA) has seen its share price struggle this year. But while high inventory levels have been dampening sales, this is still a quality business.
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The chemicals industry is more cyclical than most. And a lot of Croda’s costs are fixed, meaning the effect of falling revenues is a sharper decline in profits.
That’s the risk with this type of business. But the company has some long-term strengths that make it one I think investors should consider seriously at an unusually low price.
Inventory levels should normalise eventually and I expect Croda to do well when they do. Its profits fall faster than its sales when demand is weak, but I also anticipate them rising faster when things recover.
Equally important is the fact the company’s products are protected by over 1,600 patents. So its competitive position is a strong one and this will be important when demand recovers.
Croda has increased its dividend each year for over 20 years and I don’t think the current challenges will disrupt this. That’s why I see it as a stock to consider buying at a discounted price.
Judges Scientific
Shares in Judges Scientific (LSE:JDG) trade on the Alternative Investment Market (AIM). The stock hit £122 in May but has fallen to £84, putting it back where it was in November 2021.
The underlying business, however, has come quite a way since then. Revenues have gone from £91m and operating profits are up around 45%.
So why is the price falling? The answer comes down to a combination of factors – it trades at a high price-to-earnings (P/E) multiple and growth has stalled somewhat this year.
In the last update the firm reported overall revenue declines of 1%, with a 3% drop in organic sales offset by acquisitions. Management put this down to short-term weakness in end markets.
The risk is that this could continue. And at a P/E multiple of around 44, the current share price reflects expectations that sales are going to go up, not down.
Management expects the issue to be temporary however. If it’s right, this could be a great chance to buy shares in a quality company at a 9% discount to its price at the start of the year.
Buying opportunities
Shares in quality companies mostly trade at prices that reflect the strengths of the underlying businesses. But cyclical weakness in end markets can create unusually good opportunities.
That’s the case with Croda International and Judges Scientific at the moment. Both stocks are near their 52-week lows as the firms battle short-term demand issues.
I think investors should have these shares on their radars. Either could go lower from here, but it’s definitely worth considering whether they’ve already fallen far enough to consider buying.
