Investing in cheap stocks is a proven strategy for generating substantial returns. And those who spotted the enormous growth opportunity for Nvidia ahead of the wave of AI-related spending in early 2023 were able to snap up shares in the world’s largest company at a massive 92% discount compared to today.
However, after a stunning 1,177% return in just under three years, this growth looks like it’s already fully realised in Nvidia’s share price. Yet the same isn’t true for other AI-related stocks.
In fact, while most investors are being distracted by semiconductor manufacturers and software developers, there’s an entire underlying value chain currently being largely ignored. And Hill & Smith (LSE:HILS) sits at the heart of it.
A hidden AI player
Hill & Smith owns and manages a portfolio of 17 businesses, each specialising in their own unique niche. However, they all exist to serve one sector – infrastructure.
Despite being listed in London, this business actually makes the bulk of its money in the US. And with America investing trillions into repairing and expanding its national infrastructure, management has had little trouble finding high-margin growth opportunities.
In fact, in the last five years, the group’s underlying profits have more than doubled. And this momentum has only continued since 2023, with private companies drastically ramping up investments into building data centres.
Combining this with adjacent verticals like electricity generation & distribution, renewables, electric vehicle recharging stations, and logistic centre build-outs, among others, Hill & Smith’s excess cash flows keep expanding.
Yet despite this operational momentum, the stock still trades for a modest forward price-to-earnings ratio of 15. With that in mind, it’s no surprise that management recently launched a £100m stock buyback programme to take advantage of its cheap valuation.
What’s the catch?
Despite the ongoing strength of this business, it nonetheless has plenty of risks to navigate around. With a strong dependence on public and private sector infrastructure, Hill & Smith is ultimately exposed to long spending cycles.
Right now, that’s working to the firm’s advantage for its US-based operations, as the government is investing quite aggressively. But in the UK, it’s quite the opposite.
The dire state of public finances means that a lot of infrastructure investment, particularly in British roads, is being postponed. So much so that the group’s UK revenues are actually shrinking.
At the same time, apart from data centres and logistics hubs, the private sector isn’t spending much on infrastructure either. Higher interest rates have resulted in many construction projects being delayed or even outright cancelled.
Overall, that means most of Hill & Smith’s current progress is being driven by US government infrastructure spending. And if that were to suddenly slow down due to shifting political priorities, this tailwind could quickly turn into a headwind for the business.
Nevertheless, despite this risk factor, the group’s balance sheet appears to be in tip-top shape with negligible leverage, giving management plenty of financial flexibility to weather a potential storm.
Top this off with a cheap share price, and Hill & Smith looks like an under-the-radar investment opportunity in my eyes. That’s why I think investors may want to consider investigating it further. Yet it’s not the only hidden opportunity I’ve spotted this week.
