With stock markets trading close to record highs, I believe it’s important to be selective when investing fresh cash into the market.
Today I’m looking at two stocks I believe are still reasonably valued. In my view, both of these companies have the potential to outperform the market over the next few years. If you’re in the early stages of building a stock portfolio, they might be worth considering.
My first stock is FTSE 100 plumbing and heating group Ferguson (LSE: FERG), which was known until recently as Wolseley.
The name change is the result of the company’s decision to focus on its US business, which now accounts for roughly 80% of both sales and profits. Growth is much stronger across the pond too. Ferguson’s sales rose by 10% in the US last year, compared to just 0.8% in the UK.
Still small enough to grow
Despite a market cap of £13.5bn, I believe Ferguson is still small enough to deliver strong growth. The US construction market appears to be in good health, giving larger suppliers such as Ferguson the opportunity to expand their share of the market.
One part of this strategy involves the acquisition of smaller, specialist firms. By doing this Ferguson is expanding its product range without taking on too much debt. Indeed, the firm’s strong cash generation and low debt level are key attractions for me.
City analysts expect the firm’s adjusted earnings to rise by about 13% to 324.1p per share this year. The dividend is expected to rise by 13%, to 124.4p. These projections put the stock on a forward P/E of 16.8, with a potential dividend yield of 2.3%. In my view this could be a profitable level at which to buy.
Smaller and more exciting?
If you’re also interested in smaller companies, then you may be interested in my second pick. Recruitment group SThree (LSE: STHR) operates globally and specialises in the STEM industries — science, technology, engineering and mathematics.
Demand for specialists in these fields may vary as economic conditions change, but in my opinion demand for STEM professionals is only really likely to rise over the coming years. Meanwhile, the firm’s global focus should provide some protection against the risk of a slowdown here in the UK.
In my view, these factors help to make SThree one of the top picks in the recruitment sector.
A profitable year
The firm published its annual results last week, for the year to 30 November. These figures looked good to me. Revenue rose by 16% last year, while adjusted pre-tax profit rose by 9% to £44.5m.
Although profit margins are generally low in the recruitment sector, the group’s return on capital employed — a measure of profits relative to the assets of the business — is well above average, at 46%. This is generally a good quality signal and an indicator of a company’s ability to generate surplus cash from its activities.
City analysts are expecting earnings growth of 10%-15% per year over the next two years. These projections give the stock a forecast P/E of 13 for 2018, falling to a P/E of 11.2 for 2019. In my view this is potentially an attractive entry point, especially as the shares also offer a well-supported 4% dividend yield.
Markets around the world are reeling from the coronavirus pandemic…
And with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.
But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be daunting prospect during such unprecedented times.
Fortunately, The Motley Fool is here to help: our UK Chief Investment Officer and his analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global lock-down…
You see, here at The Motley Fool we don’t believe “over-trading” is the right path to financial freedom in retirement; instead, we advocate buying and holding (for AT LEAST three to five years) 15 or more quality companies, with shareholder-focused management teams at the helm.
That’s why we’re sharing the names of all five of these companies in a special investing report that you can download today for FREE. If you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio, and that you can consider building a position in all five right away.
Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.