Would you like to retire with a £1m stock portfolio? Of course you would.
Today I’m going to look at two stocks which I believe could deliver market-beating gains over the coming years — potentially helping you to achieve seven-figure stock market wealth.
Powering up
The first company I want to look at is temporary power solutions provider Aggreko (LSE: AGK). This FTSE 250 stock has been out of favour since 2012, but now appears to be poised to return to growth.
The company’s business is split into two divisions. Rental Solutions provides short-term power, cooling and heating for short-term projects in developed markets. Examples include sporting fixtures and providing power following natural disasters, such as hurricanes.
The Power Solutions division focuses on providing long-term services to industrial and utility customers in emerging markets. Typical examples include remote mining and oil production sites. Increasing levels of activity in the mining and oil sectors are likely to be a positive for Aggreko.
Returning to growth
The group’s half-year results showed a 10% rise in revenue. Underlying operating profit rose by 8% to £76m and the average number of megawatts on hire rose slightly to 6,560MW.
Although the group’s earnings are still expected to fall by 9% this year, Aggreko is expected to report profit growth in 2019. Analysts are forecasting a 7% rise in earnings next year, accompanied by a modest dividend increase.
The stock’s forecast P/E of 17 and 3.1% yield may seem pretty average, but I think 2018 is likely to mark a turning point, after which profits should recover. For this reason, I believe the shares could be worth buying at current levels.
Homing in on big events
My second company is also involved in providing temporary facilities for big events. Arena Events Group (LSE: ARE) builds large temporary structures for major events. Examples include grandstands, marquees, seating and ice rinks.
Over the last year, the firm has worked at events including the Royal Wedding, Wimbledon and the Cheltenham Festival, where Arena built “the largest ever temporary structure”.
It doesn’t just operate in the UK. It’s also involved in events in Europe, North America and the Middle East. To speed up expansion, it’s hoovering up smaller rivals. So far this year management has made five acquisitions, including two overseas.
Risk vs opportunity
Companies that expand rapidly through acquisition can sometimes run into problems. But well-executed deals to acquire much smaller companies can often work well.
One thing that concerns me is that Arena only floated in July 2017. Since then, the company has already raised a further £19m by selling new shares, and increased its net borrowings to £17m. This suggests to me that the business is expanding very fast, or that it doesn’t generate much free cash flow.
Despite this concern, progress so far seems reasonable. Revenue rose by 23% to £54.9m during the first half of this year, while adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) rose by 52% to £3.5m.
However, rising costs hit the group’s half-year operating profit, which I estimate at just £0.8m on an underlying basis. That gives an operating margin of just 1.5%, which is a little slim for my liking.
The shares look reasonably valued on 15 times 2018 forecast earnings, with a 2.8% yield. This could be a good growth buy, but I’d like to see a longer track record before making a decision.
