Why I’d hold onto this FTSE 100 six-bagger for another five years

Roland Head explains why this FTSE 100 (INDEXFTSE:UKX) star could outperform a popular growth stock.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Finding companies whose performance justified a long-term hold isn’t always easy. Today, I’m going to consider two potential candidates for a long-term slot in your portfolio.

A turning point?

Small cap Accsys Technologies (LSE: AXS) doesn’t have any problems finding customers for its super-durable acetylated timber product, Accoya. Sales have grown from just €15m in 2012 to €56.5m last year.

Accsys estimates that Accoya now accounts for 12% of the UK joinery market. It’s also sold in a number of overseas markets.

Today’s AGM trading statement makes it clear that demand remains strong. Sales rose by 20% during the five months to 31 August. There are only two problems.

The first is that production is already running at maximum capacity. Chief executive Paul Clegg admitted today that “we are working with our customers in order to minimise the impact of this temporary capacity limitation.”

The company doesn’t expect the benefit of new capacity to be available until the start of the next financial year, in April 2018. So there could be some risk of losing trade to competitors.

Struggling to break even

The second problem is that Accsys is struggling to become profitable.

Sales rose by 7% to €56.5m last year, but gross profit fell by 21% to €14.4m due to factors including higher timber costs and lower licensing revenues. As a result of this decline, the group’s pre-tax loss increased from €0.4m to €4.4m.

The group expects margins to improve over time. But today’s statement made further mention of rising materials costs and said the company was “reviewing the implementation of a price increase”. It sounds to me like customers might be quite price sensitive. So if Accoya prices rise too far above standard timber, I suspect sales could fall.

Broker forecasts suggest the company will report a full-year loss for both 2017/18 and 2018/19. The shares currently trade on 1.8x sales. That looks fully priced to me. I suspect there will be cheaper opportunities to buy over the next 18 months.

A six bagger since 2006

When chief executive Richard Cousins took charge at FTSE 100 catering firm Compass Group (LSE: CPG) in May 2006, the firm’s shares traded for 236p. Today that figure is 1,580p. That means Cousins has delivered a 570% gain for shareholders in just over 11 years.

Unfortunately, he has decided to retire next year. Compass shares dropped 2% today following the news, but the handover to new boss Dominic Blakemore should be orderly. Blakemore is already very familiar with the business, as he was appointed its chief financial officer in 2012 and is currently chief operating officer for Europe.

Buy, sell, or hold?

Cousins’ sure-handed guidance has resulted in Compass shares becoming quite expensive. The stock currently trades on 22 times forecast earnings, with a prospective dividend yield of just 2.2%. So should investors take profits?

I don’t think so. Although there’s a risk that Compass stock may underperform for a while, the group’s fundamental appeal shouldn’t change. Return on capital employed has averaged 20% since 2011, during which time the dividend has grown by an average of 9% per year.

In my view, Compass is likely to remain a profitable stock to hold. I’d see any significant falls as a buying opportunity.

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 of the shares mentioned. The Motley Fool UK has recommended Compass Group. 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.

More on Investing Articles

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »