The last couple of months have been pretty unsettling in the stock market. I don’t know about you, but my portfolio has taken a few knocks.
The good news is that I think the market is now offering a much wider choice of decent buying opportunities. If you have cash to spare that you won’t need for a few years, then I believe the two companies I’m writing about today could be profitable buys.
A tough competitor
Home electrical and technology retailer Dixons Carphone (LSE: DC) has faced tough trading conditions over the last year. The mobile phone market is changing and the wider market for white goods and consumer electronics is brutally competitive.
Dixons shares have fallen by about 30% so far in 2018 and are now worth about 60% less than when the groups merged in 2014. I think this sell-off may have gone too far, so I recently added the stock to my own portfolio as a recovery play.
This turnaround plan could work
My Foolish colleague Kevin Godbold covered Dixons’ half-year results here last week. Today I want to take a closer look at chief executive Alex Baldock’s turnaround plans.
Mr Baldock wants to use the group’s size to create a retail service that takes customers from product discovery through to repair and trade-in. However, he expects the main area of growth to be customer credit. The firm already makes 8% of sales on credit and Mr Baldock hopes to see this figure “at least double”.
Cheap at this price?
Dixons’ dividend was cut this week, but the firm’s profit forecast for the year was left unchanged. Debt remains low relative to earnings and cash generation is still good.
I can live with the reduced dividend, if it means that company can protect its balance sheet. Although there is a risk that trading will continue to worsen, the shares now trade on just 7 times forecast earnings. I estimate that the shares offer a forecast yield of 4.7% following last week’s cut.
In my view, this could be a good long-term buying opportunity.
Here’s what I might buy next
One company I’ve admired for several years is IT services group Computacenter (LSE: CCC). This company provides software and hardware solutions such as data centres and networking.
What I like most about this business is that it’s highly profitable. In 2017, the firm generated a return on capital employed of 21.8%. That means an operating profit of £218 for every £1,000 invested in the business. That’s a pretty decent return on investment.
These high returns mean that the group generates a lot of spare cash. Much of this is returned to shareholders, who’ve seen the ordinary dividend rise from 7.3p per share in 2006 to 27.4p per share last year.
Director shareholdings
As I write, Computacenter shares trade on 13.5 times 2018 forecast earnings with a 2.9% dividend yield. That may not seem very cheap, but I think it’s a fair price for a company that generates such attractive shareholder returns.
There is some risk of a slowdown if the UK, Germany or France fall into recession. But I think it’s worth noting that the CEO and finance director own almost £30m of shares between them. That reassures me that the firm is likely to remain carefully managed.
In my view, now could be a good time to start buying this stock.
