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2 quality and momentum stocks for investors seeking capital gains

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Integrated shipping services provider Clarkson (LSE: CKN) delivered decent full-year results today and told us that the shipping market shows “some early signs of a recovery following a sustained period of challenging trading conditions for the industry.”

A strong financial position

The FTSE 250 firm facilitates the market for moving goods around in ships with its shipbroking and ship-related financial, support and research services. I think it’s encouraging that market conditions are only at an early stage of recovery because even now the firm is trading very well. I particularly like the way Clarkson paid off its outstanding loan notes during 2017 to leave the company debt-free.

Such financial strength bodes well for a decent advance in the share price if trading conditions continue to improve. During 2017, revenue rose almost 6% and underlying earnings per share lifted 11%. The directors underlined their confidence in the outlook by pushing up the total dividend for the year by 12%, marking 15 consecutive years of dividend increases – that’s impressive.

The directors said in today’s report that there are a number of exciting opportunities for growth and the creation of shareholder value.” City analysts following the firm expect earnings to increase 21% in 2018 and 11% the next year. Meanwhile, at the current share price of around 3,360p, the forward price-to-earnings (P/E) ratio for 2019 sits just under 21 and the forward dividend yield is almost 2.6%. The valuation looks full, but I think the quality of the underlying enterprise justifies it.

Clarkson looks well placed to ride what could turn out to be a multi-year run of prosperity in the world’s shipping markets, and as such, I reckon the shares look tempting right now. And the quality and operational momentum on offer remind me of FTSE 100 speciality chemicals company Croda International (LSE: CRDA).

A strong defensive element

Since early 2009, Croda’s share price is up more than 800%, driven by steady annual increases in earnings. I think there’s a strong defensive element to the underlying business because it produces ingredients for fast-moving consumer goods in the cosmetic, personal care and pharmaceutical markets, as well as supplying the agricultural and industrial markets.

Revenues, cash flow, operating profit and the dividend all have long records of steady growth, and I think the firm looks well suited to withstand any periods of general economic weakness that may occur in the years ahead. For 2018, the company plans to continue an investment programme aimed at fast-growth technologies, which it expects will drive both organic and acquisition progress.

Croda’s return on capital and its operating margin both run close to a healthy-looking 24%, suggesting a quality underlying business that deserves a higher valuation than many other firms with lower quality operations. Today’s share price of around 4,628p leaves the forward P/E ratio for 2019 sitting just above 22, and the forward dividend yield a little higher than 2%. That valuation seems to accommodate City analysts’ expectations of 7% growth in earning during 2018 and 8% in 2019, but these increases will follow on from several years of growth, and I think the firm’s progress looks set to continue for many years to come. I certainly wouldn’t bet against Croda’s strong operational and share-price momentum now.

This could be the best FTSE 250 buy

Clarkson and Croda look set to deliver further gains. But neither stock is the growth choice of the outperforming Motley Fool share analysts. They have identified another FTSE 250 company which they believe could deliver far bigger profits.

This UK business with a well-known brand could expand to drive the share price up substantially over the years to come as the firm executes its international expansion. If you'd like full details of this potential ‘buy’, download A Top Growth Share From The Motley Fool today. This exclusive report is free and without obligation. To get your copy, just click here now.

Kevin Godbold 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.