Why I’d Buy Ashtead Group PLC, Hold BP plc & Sell Vodafone Group plc

I am on the hunt for value in a market that may remain volatile for some time, so I am looking for companies that are either undervalued or whose strong prospects of growth are backed by manageable debts. 

With this in mind, Ashtead (LSE: AHT) stands out as one of my favourite picks, followed by BP (LSE: BP)… albeit the oil producer carries more risk due to cyclicality. I am still not convinced that a bet on Vodafone (LSE: VOD) at around 220p a share will pay dividends, though. 

Growth & Yield

The industrial equipment rental group reported its trading update on 2 September, which showed a strong growth trajectory for revenues (+20%) and earnings, bucking the trend of sluggish sales for other players in the sector. Net leverage is manageable at 1.8x, while at 1,000p a share you’d be buying into a growth story that would cost you only 13x and 11x its forward earnings in 2016 and 2017, respectively. If estimates are correct, Ashtead will have grown revenue at a compound annual growth rate of 14% by fiscal 2018, which could easily support a rise in its dividend yield from 1.7% to 2.2%, and is also consistent with its track record.

Bottom fishing

BP is one of the most obvious buys in this market to me, although some analysts have questioned its dividend policy of late, suggesting that its payout ratio may not be sustainable. A 7% forward yield signals risk, but so what? A lower dividend may not be necessarily bad news after all, and I’d be happy to get 4% rather than 7% in a low rate environment — I am betting on capital appreciation in the region of 30% to 50% in less than two years. If it’ll take longer to achieve that, so be it. I think the bears are wrong, and even depressed oil prices do not concern me a bit. At 330p a share, BP not only is a compelling buy but it could be the stock that helps the FTSE 100 recover over the next 12 to 18 months. Its balance sheet and cash flow profile have been severely tested over the last couple of years, and the next two years won’t be easy, either — yet management has reacted swiftly and its asset base leaves plenty of room for value creation.   

Wait & see 

So much has been said and written about Vodafone that now may be well the time to wait and just check out its quarterly financials on 10 November. Goldman Sachs cut its price target today to 245p, but if you had read my previous coverage, you’d have expected weakness and a much lower valuation than 245p for some time. The problem is that Vodafone’s geographical mix isn’t particularly appealing, which is reflected in a growth rate (a tad above 0%) that does offer little reassurance to value investors looking for yield. My advice is to keep an eye on its free cash flow profile when results are due — any miss could badly hurt shareholders and its dividend policy. 

Those are not risks that you'd have to face with Ashtead and a few other outstanding value candidates that could deliver steady returns over the time.

Our free report identifies shares that boasts a strong track record over the last decade, and whose prospects of growth are even more enticing in this market, in my view.

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Alessandro Pasetti 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.