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Why I’d Buy McColl’s Retail Group PLC And Dunelm Group plc & Sell ISG PLC

Here I am running the rule over three of the laggards in Tuesday business.

McColl’s Retail Group

Even though McColl’s (LSE: MCLS) reported breakneck profits growth in 2014 earlier today, the market has responded by dumping the stock in droves and the business was last 9.6% lower in Tuesday trade.

The convenience store specialists — which floated on the London Stock Exchange last February — saw total sales ratchet 6.1% higher during the nine months to November, to £922.4m, driving pre-tax profit to £12.6m from £4.4m a year earlier. And McColl’s said that it has the financial clout to keep its aggressive expansion scheme rolling — the firm opened its 800th store back in December and is looking to unveil its 1,000th by the close of next year.

The City expects last year’s terrific performance to continue well into the future, and have chalked in further earnings rises of 16% and 8% in fiscal 2015 and 2016 correspondingly. These figures leave the business dealing on P/E multiples of just 9.9 times and 9.1 times prospective earnings, below the watermark of 10 times which represents unmissable value for money.

In addition, McColl’s is also anticipated to raise the dividend this year and next, with figures of 10.9p per share for 2015 and 11.8p for 2016 resulting in monster yields of 6.1% and 6.8% respectively. I believe the company is a steal for both income and dividend investors at current prices.

Dunelm Group

Furniture retailer Dunelm (LSE: DNLM) was recently trading 6% down in Tuesday business, calling an abrupt halt to the stock’s strong performance in recent weeks. The firm announced last month that like-for-like sales leapt 6.2% in the six months to December, to £406.4m, a result which drove pre-tax profit 10.7% higher to £68.2m.

City brokers expect the company to maintain this terrific momentum, and earnings expansion to the tune of 8% and 9% for the years concluding June 2015 and 2016 correspondingly are anticipated, resulting in earnings multiples of 19.4 times and 17.7 times for these years.

It could be argued that Dunelm’s terrific record of year-on-year earnings growth merits this premium above the benchmark of 15 times which represents attractive value for money. But for those seeking lip-smacking value the retailer could be considered a ‘vanilla’ stock choice, particularly as dividend yields also lag the market.

Even though Dunelm is expected to raise the total payout from 20p per share last year to 21.6p this year and 23.7p in 2016, these figures only produce yields of 2.4% and 2.6% respectively. Still, I believe that the company is a sensible choice for those seeking access to a quality retail stock which is clearly “on the up.”

ISG

Shares in construction specialists ISG (LSE: ISG) are currently leading the FTSE indices lower, the result of a poor half-year update and share placement driving the stock 29% lower on the day.

The business announced that it had swung to a loss of £20.8m in the six months to December from the £1.7m profit clocked in the corresponding 2013 period, primarily as a multitude of contract issues smashed project performance across its UK Construction arm. ISG has announced restructuring of this division, but in the meantime has been forced into a £13m rights issue.

City brokers currently expect ISG to record a 34% earnings slide in the year concluding June 2015, leaving the business trading on a reasonable P/E rating of 15.8 times. Although a 135% bounceback is predicted in fiscal 2016, I believe the threat of further overhang related to old contracts could stymie expectations of any such recovery.

On top of this, analyst expectations of dividend hikes both this year and next — from 9.45p per share last year to 9.6p in 2015 and 10.4p in 2016 — are due to come a cropper, with ISG obviously electing not to fork out an interim dividend today and advising of a 4.91p final dividend. Given the problems the firm faces I believe dividend chasers could end up sorely disappointed.

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