If You Crashed After Tesco PLC, Then It’s AA PLC To The Rescue!

AA PLC (LON:AA) could tow you out of your Tesco PLC (LON:TSCO) trouble.

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Last week I suggested that Fools who had got a little chewed up with Aviva’s rollercoaster final quarter might want to look at grabbing shares in Jelf (LSE: JLF) for their portfolios, after a cashflow-positive story combined with some enviable operating success this past year meant the firm was ideally positioned to snap up struggling competitors at a bargin.

Well, come Tuesday, and the insurer acquired rival Beaumont for a song, sending Jelf shares 10 % higher the following day.

With great companies that are on the up, you can’t afford to sit about and wait for bargains, especially in markets that are a little on the saturated side with poorer-performing companies that hold no appeal whatsoever right now. Probably the poorest comparative performer this year has been Tesco (LSE: TSCO), which I tried to warn readers off only weeks before all the major trouble there began. There’s been a lot of chat, but the truth is that things aren’t likely to get much better there any time soon, so if you are holding on in vain trying to recover previous losses with a little late-stage momentum rally, you are better off looking elsewhere.

AA To The Rescue

Appropriately enough for investors whose portfolios could do with a repair right now, AA (LSE: AA) holds some really nice appeal going into the New Year.

It’s worth noting briefly first that are a number of superficial quantitative similarities between AA and Jelf: both companies are trading at around 25x P/E, both are up 42% in 2014, and both have recently received affirmations of “buy” ratings by the investment bankers who represent them (and therefore know them best) in the past month, accounting for an identical 14% rise in the share price over the past financial quarter.

These are not mere coincidences, despite the fact that the companies are far apart in size (AA is worth £1.85 billion right now). Good stocks tend to trade similarly for a good reason: the same investors are buying them at more or less the same time. Also, they have competent management teams that are judging the market right, skipping the need to go announce something important when the going is rough and instead saving the pitch for when everyone’s in the mood.

That said, these past two quarters have been especially tricky, however great your timing of the market feed might be. Which is why it’s especially impressive in the case of AA that the company, loaded up to the eyeballs in debt, went for the chance to IPO in July and has since posted such an impressive performance.

Red Hot IPO

AA owes a lot of its good fortune right now to its advisers Liberum, who seized the chance to steamroll an 11th hour deal into the market by pitching AA’s former owner with an impressive case for the British insurer to go public over the summer when no one was looking.

But it’s also shown that with the newfound headline status and extra capital, it can deliver on the things that matter to investors – and fast. Thus, while AA’s actual numbers of policies in force have shrunk on the year-ago period as it has contended with the same difficult operating environment that everyone has lately, the company’s profit for the period is 88% higher, at £28.9 million. That’s the kind of story that just makes you feel great about IPOs.

Revenue increased in line with the insurer’s cost of sales, which is important when you are dealing with claims, as any spike in sales costs not matched by income at some level leaves the company’s future growth exponentially more open to the risk of value erosion, since the same policies also potentially lie in wait as claims.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Daniel Mark Harrison has no position in any shares mentioned. The Motley Fool UK owns shares of Tesco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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