The market crash has sunk good and bad stocks alike. There will be bargains out there, but finding them can be tricky as there are a dizzying number of UK stocks to consider. A simple stock screen should help cut through the chaff.
The financial services, basic materials, consumer cyclical and energy industries are best screened out at present. A very low or high beta won’t do, so historical betas of 0.8-1.2 should do the trick.
Financial strength is essential now, so debt-to-equity ratios of less than 51%, current ratios of at least one, and EBITDA-to-interest expense of greater than five are criteria for inclusion. Healthy gross and operating profit margins of at least 50% and 12% respectively, and return on equity of at least 12%, round out my screening criteria.
Three companies passed my test. Fevertree (LSE: FEVR) is my pick of the bunch. Judges Scientific, a scientific instrument producer, and Spirent, a telecommunications company, may also be worth considering.
Give me fever
Fevertree’s share price is far below the highs seen in late 2018. The broader market crash has not helped, but even before that, the trend was down for shares of the maker of premium alcoholic mixers. Investors viewed the 2019 trading update, and previous ones, as disappointing.
Why would I recommend Fevertree then? Well, the 2019 update showed a contraction in UK sales, but most drinks firms suffered a similar fate in 2019. Setting the lacklustre UK market aside, Fevertree saw double-digit revenue growth in the rest of the world. International revenues, where the real growth potential is, will soon surpass those from the UK.
Fevertree is a well-known beverage brand. Such brands have a track record of staying power. I think people will probably be drinking Fevertree products for a long time to come, which is something renowned fund manager Nick Train likely considered when he bought the shares earlier this month.
Fevertree is relatively capital-light. Property, plant and equipment make up just 10% of non-current assets. The bulk of assets are in things like inventory, receivables and cash, which gives the company an attractive liquidity profile.
Revenues will take a hit over the coming months, of course. Inventories may face a write-down to shift product. However, the company looks in good financial shape to deal with these challenging times. Fevertree’s shares look cheap to me when considering what the company can deliver in the years to come, and I’m buying.
Mixing it up
Meanwhile, looking at my other picks, today Judges released its final results for the year ended 2019. Revenues grew by 5.9% to a record £82.5m. Reported profits rose, and dividends have been increased by 25% for the year to 50p and a yield of 1.47%. According to management, no tangible impact on the business is expected if the coronavirus outbreak is contained within two months. If Judges shares perform in the future as they did in the past, the fact that they’re some 40% cheaper now than a few weeks ago might be appealing.
And Spirent? The company also passed my screen. But I’m not familiar enough with the company to judge it. However, my Foolish colleague Kevin Godbold thinks it’s a good buy.
James J. McCombie owns shares in Fevertree. The Motley Fool UK has recommended Judges Scientific. 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.