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Is this a recovery stock to buy after 25% share price gain in 2019?

I’ve always been wary of Daily Mail and General Trust (LSE: DMGT), not really seeing how the Daily Mail publisher was going to keep its profits growing with the demise of paper publications and the shift to online communications.

That fear seems to be reflected in a 19% share price fall over five years, but since the start of 2019 we’ve seen a 26% rebound. DMGT shares did something similar in 2018, mind, before crashing back in the second half of the year.

First-half results announced Thursday revealed an 11% jump in adjusted operating profit on a modest 1% rise in revenue, though bottom-line adjusted EPS fell by 8% on the back of the disposal of ZPG and tax normalisation.

Cash

The interim dividend was lifted 3% to 7.3p, and the company reported £862m in capital returned to shareholders in April 2019, including £200m by way of a special dividend. Net debt stood at £146m, only 60% of EBITDA, so the balance sheet looks healthy.

Current UK investment darling Nick Train is backing the company, and if you don’t know who he is, he’s part of the brains behind Lindsell Train Investment Trust, whose shares are up 90% over the past year. As an aside, I think Lindsell Train shares, on a premium to NAV of around 80%, are exuberantly overvalued, but I do see top quality investment management there.

DMGT provided a dividend yield of 3.3% last year, and it does appear to be strongly cash generative, so I’m starting to think my past bearishness might just have been down to my own lack of understanding of the company.

It’s now on my ‘stocks to research’ list.

Big gain

AIM-listed Mereo BioPharma (LSE: MPH) saw its shares spike up 14% in Thursday morning trading, and I wonder if that could be the start of another share price recovery — in this case from the slump that took hold towards the middle of 2018.

The latest rise comes on the back of encouraging early data from a clinical study of one of the company’s drugs, an anti-sclerostin antibody, BPS-804, otherwise known as setrusumab.

It’s aimed at patients with Type I, III or IV Osteogenesis Imperfecta, the group of genetic disorders known collectively as brittle bone disease. The trial, it seems, showed “clear and encouraging percentage changes over baseline” from measurements of volumetric bone mineral density.

Profit prospects

A successful treatment for brittle bone disease is something that I think could make big money in the affluent developed world. But I’m wary of the costs needed to get a drug candidate all the way to approval, sales, and profits. There are no profits for Mereo on the cards for at least the next couple of years, and the year to December 2018 resulted in a post-tax loss of £32m.

After the completion of its merger with OncoMed in April, the enlarged company reported cash resources (including short-term deposits and investments) of £53.9m. With research and development costs reducing as its key prospects reach later stages in the development cycle, that should keep it going for a couple more years.

The problem for me is that we have no idea what dilution of current shareholders’ interests might happen before profit day arrives, and that risk keeps me away. But I’ll keep watching.

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Alan Oscroft 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.