Strix

As I type, shares in kettle safety device manufacturer Strix (LSE: KETL) are up 70% over the last year. That’s a superb return for what is, admittedly, not the most exciting of businesses. In fact, KETL has been a winning AIM stock since coming to the market. In four years, the shares are up 173%.

This momentum might just continue. In July, the company said it was now expecting to deliver revenue growth of 50% or so for the first half of 2021, and roughly 30% for the year as a whole. Any improvement to the latter when interim numbers are confirmed in September should do the share price no harm.

I’m not the only one bullish on Strix either. Earlier this month, analysts at Liberum said the company was primed for a re-rating, due to the potential earnings growth on offer. 

Of course, there’s a chance the shares could lose steam at some point. Early holders may want to bank some profit, for example. Even so, a valuation of 24 times forecast earnings still doesn’t feel unreasonable. The solid dividend stream compensates me for choppier times too.

Inspecs

Eyewear manufacturer and distributor Inspecs (LSE: SPEC) is another AIM stock I’d buy now. Its shares are up 51% in value over the last year. In its 18 months as a listed company, SPEC has returned 86%.

All this is rather impressive considering Inspecs came to market at the worst possible time. Due to Covid, group revenue fell almost 25% to $47.4m in 2020. The firm also reported a post-tax loss of $8.9m. 

Still, next month’s interim figures should be more encouraging. Inspecs has certainly been preparing itself for better times by snapping up lens maker Norville and manufacturer Eschenback. It’s also been adding new global brand licences to its portfolio. 

Yes, a P/E of 30 is getting punchy and shares are less liquid than those of other companies (meaning price moves could be more pronounced). However, I think the ‘essential’ nature of its products makes up for this risk.

Mortgage Advice Bureau

A final AIM stock worth buying in advance of September is Mortgage Advice Bureau (LSE: MAB1). As one might expect, trading has been excellent of late, thanks to a booming UK housing market. However, shares now trade on 39 times earnings, having climbed 123% in value in 12 months. Is this too high?

It’s certainly not cheap. Then again, recent demand for housing (and, by association, MAB’s services) surely won’t grind to a halt. More people are wanting to work from home, after all. Moreover, I’d be shocked if next month’s interim results were anything but great. 

As a (mostly) buy-and-hold investor, I also think it’s important not to base an investment decision purely on a single metric. Expensive stocks can continue going up if they can carry on growing. As an aside, returns on capital are high and the firm has net cash on its balance sheet — just the sort of things I look for.

MAB’s still a buy for me.

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Paul Summers owns shares in Strix. 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.

Boring but beautiful

Yes, I know — JHD’s line of work will never quicken the pulse in the same way as a blue-sky tech stock might. Then again, I find many of the best long-term investments tend to be those that never make the headlines. Despite shares up roughly 2,000% over the last 20 years, James Halstead has managed to remain a low-key operator.

Today’s interim results show the mid-cap firm is continuing to do all the right things. At £130.5m for the six months to the end of last December, revenue was pretty much identical to that achieved last year. However, it’s worth pointing this level of sales was a record for the company. That’s some feat considering how disruptive the pandemic has been. At £26m, pre-tax profit was 3.3% higher than over the same period in 2019. This was another record result.

As an investment, James Halstead ticks a lot of my boxes. It operates in many markets around the world, serving customers in many industries (retail, hospitality, healthcare). It also generates great returns on capital — a key metric for star fund managers such as Nick Train and Terry Smith. On top of this, JHD has a bulletproof balance sheet and consistently increases its dividends.

All this aside, there are a few drawbacks to investing now. For one, the shares are expensive to acquire, trading as they do on 29 times forecast earnings. While performance over the very long term has been fantastic, some may be put off by the fact that the company is now worth over £1bn. As such, big share price gains are less likely going forward. 

On balance though, I’d be happy to add a stake to my Stocks and Shares ISA today.

Under-the-radar winner

Another quality AIM-listed stock, in my opinion, is Mortgage Advice Bureau (LSE: MAB1). Like James Halstead, the stock has shown itself to be an excellent long-term investment. Since listing in 2014, the share price has climbed over 600%.

Last week’s full-year results for 2020 suggests there’s more to come. Despite gross new mortgage lending falling 9% in the market as a whole, MAB’s revenue rose by 3% to a little over £148m.

Mortgage completions were up by 5% to £17.6bn and the firm grew its market share of new mortgage lending to 6.3%. Quickly establishing itself as an excellent source of dividends, the mid-cap also raised its total payout by 46%!

In terms of risk, MAB is clearly exposed to a any downturn in the housing market. While the Stamp Duty holiday extension and the growing availability of 95% mortgages are reasons to be optimistic about demand, we still don’t know the full economic impact of the pandemic.

Secondly, the shares are even more expensive to buy than those of James Halstead. MAB has a forecast P/E of 31.

Of course, it isn’t necessary to invest in MAB directly to get exposure. The company makes up almost 4% of CFP SDL Free Spirit — a fund I hold within my own Stocks and Shares ISA.

The post 2 high-quality AIM shares I’d buy for my Stocks and Shares ISA appeared first on The Motley Fool UK.

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Paul Summers owns shares of CFP SDL Free Spirit. 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.

As investors, we learn that the greatest gains can often come where others fear to tread. So, could those buying now profit handsomely in time? It’s certainly possible. News of a vaccine or simply a drop in infection rates could see markets rally. In such a situation, it’s likely that the biggest victims of the pandemic will fly the highest. 

Having said this, it’s vital to consider the risk/reward payoff. The reason the IAG share price is so low (not helped by the recent equity fundraising) is because the market is concerned that it will take air travel a long time to fully recover. We’re talking years, not months. On top of all this, the company is understandably no longer paying dividends. For me, this was the chief attraction to owning the shares in the past.

In light of this, I think investors should consider alternative, high-growth destinations for their cash. Here are just two suggestions.

Dotdigital

In July, software provider dotDigital (LSE:DOTD) said that the pandemic had a “minimal impact” on trading since most of its revenue (estimated at 85%) was recurring. Indeed, adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) was now expected to be “comfortably ahead of market expectations“.  In contrast to the IAG share price, dotDigital’s valuation understandably soared!

In addition to this momentum continuing into the new financial year, the firm announced yesterday that it would be included in the government’s G-Cloud initiative. A new market for dotDigital, G-Cloud is a platform allowing public sector organisations to buy services without running a full tender.

Any drawbacks? Well, the shares certainly aren’t cheap at 39 times forecast FY21 earnings. Then again, the company reeks of quality with consistently high margins and returns on capital employed. Importantly, it also has net cash on its balance sheet — handy given the outlook for the global economy. 

At this price, dotDigital isn’t a screaming buy, but it’s certainly one to consider scaling into and/or buying on any dips. 

Mortgage Advice Bureau

Another stock posting great growth recently has been Mortgage Advice Bureau (LSE: MAB1).

Despite “an exceptionally challenging market“, yesterday’s interim results for the first half of 2020 included a 4% rise in revenue (to £63.5m) and 6% increase in adjusted pre-tax profit (to £7.9m).

Since the housing market reopened, the company has seen “continued strong trading“. New applications have climbed to record levels and its share of the new mortgage lending market rose 17%. 

As a result, the firm’s management expects that adjusted profit before tax for the full year will come in “significantly ahead” of what the market was predicting. This is dependent, of course, on no further coronavirus-related restrictions being announced. 

The shares currently trade on a very high 41 times earnings. However, a PEG (price-to-earnings/growth) ratio of just 0.5 suggests investors will actually be getting quite a lot of bang for their buck.

Like dotDigital, I think this company warrants more attention, particularly from those tempted by the IAG share price.

The post Tempted by the IAG share price? I’d consider these top growth stocks instead appeared first on The Motley Fool UK.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended dotDigital Group. 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.

The Bureau

Today’s financial highlights included a 17% rise in revenue to £57.9m and a 9% rise in gross profits to £13m, while earnings per share (EPS) rose 11% to 11.7p. The disappointment was a dip in gross margins, from 24.1% to 22.5%, although this is hardly catastrophic. Its cash balance also dipped, from £13.2m to £12.5m.

Management could nonetheless boast of a “strong financial position with significant surplus above regulatory capital requirement”. This is a growing business too, with adviser numbers climbing 6% to 1,138 at 30 June, gross mortgage lending up 25% and market share of new mortgage lending up 12% to 4.7%. The interim dividend was lifted 12% to 10.6p giving a forward yield of 3.8%, with cover of 1.1.

Market fall

Peter Brodnicki, chief executive of the £319m AIM-listed company, said the company has posted “a clear outperformance against the housing market which has seen a 5% fall in the number of transactions,” helped by mortgage product transfers and protection sales.

I suspect investors may be worried about the group’s toppy valuation, a pricey 24.2 times forward earnings. City analysts are forecasting 9% earnings growth this year and 16% next, so Mortgage Advice Bureau could still justify its price, providing the housing market holds up. My Foolish colleague Kevin Godbold rates it highly.

China crisis?

Slowing or falling house prices will hit every business with exposure to the mortgage market, although £135bn global behemoth HSBC Holdings (LSE: HSBA) has some rather handy diversification. Unfortunately, it also has outsize exposure to China, which is a concern as President Trump’s trade war threats intensify, the emerging markets crisis threatens contagion, the yuan falls 10% and the country’s debt pile continues to roll up.

HSBC has been throwing money at its retail and investment banking units in Hong Kong and China, the region that generates the bulk of its profit growth. This helped to drive the 7% increase in operating expenses to $17.5bn, shown in its recent interims. Despite this, the bank still managed to post a 5% rise in interim pre-tax profits to $10.7bn.

Going cheap

The group also has exposure to a property meltdown, in this case Hong Kong residential, which is being squeezed by higher interest rates. Investment group CLSA recently predicted a 15% drop over the next 12 months.

Otherwise the bank is also putting past scandals behind it, following the $765m settlement-in-principle to resolve the US Department of Justice’s civil claims over residential mortgage-backed securities.

Bargain price

Peter Stephens reckons that HSBC’s long-term pivot to Asia will pay off in the longer run, while I admire its low valuation of just 11.9 times earnings, combined with a whopping forecast yield of 5.9%, covered 1.4 times. With the bank’s EPS forecast to rise 53% this year, then 5% in 2019, the 7% share price drop over the last 12 months looks like an opportunity to buy.

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harveyj has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings. 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.

One of the things I like most about MAB1 is the debt-free balance sheet. In 2017, the unrestricted cash balance went up just over 22% to £13.2m. The firm’s strong financial base is a good platform to build further growth upon.

Expansion on track

Today’s full-year results demonstrate that expansion is on track. Revenue and adjusted earnings per share both increased by 17% during 2017 compared to the year before, and the directors expressed their confidence in the outlook by pushing up the total dividend for the year by 17% too.

Gross mortgage completions came in 18.5% higher at £11.9bn and the firm said its market share increased 13% to 4.6%, suggesting it is becoming a strong force in Britain’s mortgage advice market. Since the end of the year, the company’s adviser-count has grown to 1,096 and the directors expect to grow numbers further during 2018.

In 2017, the enterprise earned 43% of its revenue from mortgage procurement fees, but that’s not the only string to the company’s bow. Some 39% came from protection and general insurance commission, 16% from client fees and 2% from other sources.

Although MAB1 operates in a cyclical sector – as do all financial companies including the big banks – the immediate outlook is positive. City analysts following the firm expect earnings to grow around 12% this year and 16% during 2019, which is a robust rate of growth. Meanwhile, today’s share price around 586p puts the firm on a forward price-to-earnings (P/E) ratio of 19 for 2019 and the forward dividend yield runs close to 4.8%, which looks like a full valuation, but fair considering the growth on offer.

Bigger does not necessarily mean safer

MAB1’s market capitalisation sits close to £298m making it a minnow compared to Barclays’ gargantuan £37bn. I can understand why investors are drawn to big, well-known names on the stock market, but I’m not convinced that Barclays will make a safer investment than MAB1. Both firms operate in cyclical markets and the downside can be brutal if you catch a cyclical downturn, however big the market capitalisation.

Yet Barclays’ valuation looks attractive at first glance. Today’s share price around 217p throws up a forward P/E rating of just over nine for 2019 and the forward dividend yield runs a little higher than 3.6%. Forward estimates suggest earnings will rise around 15% during 2019. But Barclays’ earnings have been patchy over recent years, falling more often than rising year to year.

I don’t trust the market to ‘allow’ Barclays’ stock to advance very far. I think the valuation will remain subdued, and could even contract as earnings rise, because the market will be trying to anticipate the next plunge in earnings that often comes around in a cyclical operation. Meanwhile, the operational momentum at MAB1 reflects in good share-price momentum, which looks set to continue. That’s why I’d sell Barclays shares to buy shares in Mortgage Advice Bureau.

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays. 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.

The two companies I’m looking at today could equally be described as overvalued or as good value. Which of these descriptions you choose depends mostly on your view of the UK property market.

Both of these companies look like good businesses to me, but is now the time to buy?

A strong performer

Shares of land, property and construction group Henry Boot (LSE: BOOT) rose by 5% yesterday after the firm said 2017 profits should be “comfortably ahead” of market forecasts.

The shares have risen by 50% so far this year, lifting the group’s market cap to £394m. As you’d expect, the stock is no longer obviously cheap.

Although Henry Boot’s forecast P/E ratio of 12.9 may seem modest, the firm’s price-to-book ratio has risen to 1.7, while the forecast dividend yield has fallen to 2.5%. These figures suggest to me that the stock is quite fully valued.

Although this valuation does seem to be supported by recent trading, my concern is that the pace of growth in this sector appears to be slowing. After rising by 24% last year, Henry Boot’s earnings per share are expected to rise by about 10% in 2017, and just 3% in 2018.

Although the market for new-build houses still seems strong, recent commentary from several commercial property companies has suggested that the tail end of the market may be approaching.

I wouldn’t sell shares in Henry Boot just yet. But I would keep a close eye on the market.

Incredibly high returns

Many investors believe the ultimate test of a business is its return on capital employed (ROCE). This ratio measures a company’s profits relative to the capital invested in the company.

By this standard, Mortgage Advice Bureau (LSE: MAB1) is one of the best companies you’ll find. This mortgage broker generated an incredible ROCE of 91.9% last year. To put this figure in context, an ROCE of more than about 15% is usually considered quite high.

The group is fairly large, with a network of about 900 advisers and a range of more than 12,000 mortgage products. Revenue has risen from £18.2m in 2011 to £92.8m in 2016. Earnings per share have risen at a compound average rate of about 50% per year over the same period.

However, these figures have to be seen in the context of the long-running housing boom we’ve seen in recent years.

Mortgage Advice Bureau’s advantage is that its fixed costs are relatively low. Much of the pay earned by its advisers is on commission, so when mortgage sales rise, the group’s profits rise quickly as well.

The downside of this situation is that if demand for mortgages does start to fall, Mortgage Advice Bureau’s profits could also slide fast.

The group’s stock currently trades on 19 times forecast earnings, and offers a covered dividend yield of 4.7%. If market conditions remain stable, then I think this valuation could be an attractive entry point.

For now, I’d hold. But investors will need to watch carefully for any signs that sales growth is slowing.

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Roland Head has no position in any 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.

Hargreaves Services’ core operations will now comprise coal distribution, specialist earthworks and infrastructure services, industrial services and transport and logistics services. And with Hargreaves Services controlling around 18,500 acres of property across the UK, it plans to create significant medium-term value and cash generation from the development of projects within its property portfolio.

Clearly, Hargreaves Services has experienced a difficult period in recent years, but today’s announcement seems to have been well-received by the market and could indicate the start of an improved period for the business. However, it may be prudent to wait for evidence of improving financial performance before buying a slice of the business – especially since Hargreaves Services trading remains mixed.

Sticking to the timetable

Also reporting today was transport company Stagecoach (LSE: SGC), with its trading statement showing that it’s on target to meet full-year expectations. Although like-for-like (LFL) sales growth of 4.6% was recorded in the company’s Virgin Rail Group alongside LFL growth of 2.5% for Stagecoach’s UK rail segment, it has warned of a challenging future for the division.

That’s because the overall industry rate of revenue growth has slowed in recent months and looking ahead, Stagecoach sees further deterioration over the medium term. It expects weakening consumer confidence, terrorism concerns, sustained lower fuel prices, the related effects of car and air competition as well as slower UK GDP growth to have a negative impact on the industry.

Clearly, this paints a downbeat picture of the company’s outlook. However, Stagecoach continues to offer a fairly wide margin of safety so its risk/reward ratio remains appealing. For example, it trades on a price-to-earnings (P/E) ratio of just 9.2 and with it yielding 4.7%, remains an enticing income and value play for the long term.

Stake sale

Meanwhile, shares in Mortgage Advice Bureau (LSE: MAB1) have slumped by 11% today after it announced that a group of major shareholders is planning to sell a 15% stake in the financial advisory business. With this including a number of senior directors including the Chief Executive, the market has reacted negatively to the news.

With Mortgage Advice Bureau forecast to increase its bottom line by 12% in the current year and by a further 19% next year, investor sentiment could improve over the medium term. And with Mortgage Advice Bureau having a price-to-earnings-growth (PEG) ratio of just 0.9, it seems to offer good value for money. However, with the outlook for the UK housing market being relatively uncertain, it may be prudent to look elsewhere at the present time – especially while investor sentiment in the company is apparently coming under pressure.

The post Don’t invest in Stagecoach Group plc, Hargreaves Services plc and Mortgage Advice Bureau (Holdings) plc until you’ve read this appeared first on The Motley Fool UK.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended Stagecoach. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.