A lot of private investors concentrate on smaller companies, and that can be a profitable strategy as many of them are overlooked by institutional investors and under-researched bargains can be found. So what of these three releasing news today?
Castings (LSE: CGS) is a company that makes, erm, castings — iron ones, and it shifts lots of them. The share price has been picking up of late, but today it’s down 4.8% to 433p (and was down 7% at one stage). The cause is a brief comment in today’s AGM announcement, which says there’s been a softening in demand since June.
That shows one of the biggest mistakes we can make, I think — overreacting to short-term news, when it’s the long-term performance that matters. The Brexit referendum will raise some fears, with nearly 40% of Castings’ turnover coming from EU countries, but there’s a bonus too in the fall of sterling, which makes the firm’s exports more attractive.
Castings is a smaller company (with a market cap of £189m), its hi-tech production is at the leading edge of the business, its sales are nicely diversified geographically — and the shares are on forward P/E multiples of around 13, with dividends yielding a bit over 3%. Looks solid to me.
AIM-listed Mears Group (LSE: MER) provides housing and social care services. It’s been a profitable business, with steadily rising earnings only interrupted by a dip in 2015, but with growth on the cards for this year and next. At the halfway stage, reported today, normalised EPS had dropped by 7%, though the dividend was lifted by 6% and chief executive David Miles said the board “expects underlying trading for the full year to remain on track” before one-off costs.
Our housebuilders might be in gloomy days right now, but the rental sector looks set to strengthen, and a company like Mears could do very well out of it in the next decade or two. Dividend yields are modest at around 3%, but we have double-digit earnings growth predicted for this year and next. And with the 413p shares valued at under 12 times forecast earnings, dropping to just 10 for 2017, I’d say we’re looking at a tempting growth valuation here.
With PEG ratios of 0.5 and 0.7 indicated for the two years (where 0.7 and less is usually considered very good), I can see Mears Group rewarding shareholders nicely in the coming years.
Cash from plastic
Shares in Polypipe (LSE: PLP) plunged after the EU referendum, but they’ve been picking up since, and a 3% boost on the back of first-half results has taken the price to 298p today. The company, which unsurprisingly makes plastic piping, turned in a storming performance, with underlying pre-tax profit up 45% and underlying EPS up 48%. The interim dividend was lifted by 35%.
Polypipe seems like another overlooked company on a low valuation — this time on a P/E of 12, dropping to 11 for 2017, with with dividends of around 3.5% predicted. It’s the biggest company of today’s three with a market cap of £590m, it’s a highly cash-generative business, and it appears to be Brexit-resistant — the firm said “order intake has remained consistent with the normal seasonal pattern and [is] yet to show any signs of weakening following the EU Referendum.“
Polypipe is another that I reckon deserves close attention.
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Alan Oscroft 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.