2 stocks that could help you retire with £1m

Roland Head explains why these mid-cap stocks could deliver above-average returns.

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A £1m portfolio would be enough for most of us to retire in comfort. But unless you already have a lot of spare cash, achieving this goal is likely to require market-beating investment returns.

Today I’m going to look at two companies I believe have the potential to beat the market.

Order backlog up by 69%

FTSE 250 defence group QinetiQ Group (LSE: QQ) delivered a welcome return to sales growth in its 2017 financial year, which ended on 31 March.

Revenue rose by 3.6% to £783.1m, while pre-tax profit climbed 16.2% to £123.3m. Underlying earnings rose by 11% to 18.1p per share, while the dividend was increased by 5.3% to 6p. These figures give QinetiQ a trailing P/E of 17 and a dividend yield of 1.9%.

The order backlog rose from £1.3bn to £2.2bn last year. The bulk of this increase was down to a £1bn amendment to the group’s Long Term Partnering Agreement with the UK Ministry of Defence. The company says this is its “largest and most significant contract since privatisation.”

Last year’s acquisitions of Meggitt Target Systems and Australia’s RubiKon Group are also expected to drive new business, with a particular focus on international growth.

Why I’d buy

QinetiQ isn’t cheap, but the outlook seems positive and the firm’s financials are very solid. The group ended last year with net cash of £221.9m, despite a cash outflow of £65.7m relating to the two acquisitions.

The company generated an underlying operating margin of 15.1% last year. This contributed to a return on capital employed (ROCE) of 19%. That’s higher than any of the firm’s rivals in the UK defence sector.

In my view, QinetiQ’s proven profitability and healthy balance sheet mean that it remains a strong hold and a possible long-term buy.

Discount property to buy?

London-focused property group Helical (LSE: HLCL) said on Thursday that the valuation of its like-for-like London property portfolio rose by 9.8% to £666m during the year to 31 March. Contracted rents were 16.9% higher, at £27.9m.

By contrast, the performance of the group’s regional portfolio, which is focused on Manchester, fell by 2.1% to £351m on a like-for-like basis. Contracted rents of £24.3m were below the firm’s estimated rental value for the portfolio of £26.6m.

In my view, the key metrics when investing in property are yield and net asset value. Helical’s EPRA net asset value per share — an industry standard measure — rose by 3.7% to 473p last year. When compared with the current share price of 337p, this means Helical is trading at a 28% discount to net asset value.

However, if falling rental values in the regional portfolio are any indicator, property values could also fall over the next year.

It’s also worth noting that Helical has a relatively high level of gearing, with a loan-to-value ratio of 51% at the end of March. The group’s debt maturity profile is also quite short, at just 3.6 years, so Helical will need to refinance some debt over the next two or three years.

I’m attracted to Helical’s discount to net asset value, but the 2.6% dividend yield isn’t especially exciting and gearing is quite high. I’d hold for now, with a view to buying more at a lower price.

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.

Roland Head has no position in any shares mentioned. The Motley Fool UK has recommended Meggitt. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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