Down by roughly two‑thirds over the past year, it’s a brutal hit for what used to be a solid mid‑cap FTSE share. Yet some analysts still think the price could more than double from here over the coming years, based on forecasts of a sharp rebound in profits and cash flow.

That would be a nice payday for investors buying today. But cheap doesn’t always mean good value, so I decided to take a closer look.

Why the dip?

Robert Walters places professionals into permanent, contract, and interim roles in the UK and Europe. The last couple of years have been tough as hiring freezes and weaker business confidence hit demand, particularly in white‑collar roles.

Management describes client and candidate sentiment as “cautious” and expects near‑term net fees to remain under pressure. The latest full‑year numbers show net fee income down 14% year on year, reflecting that slowdown in hiring activity. The group swung to a loss, with return on equity (ROE) sitting around -22% — not a good sign for shareholders.

In response, the board has suspended the dividend to conserve cash and protect the balance sheet.

Down, but not out

Despite the struggles, there are some positives. The company has cut operating costs and reduced headcount, which should help profits recover if hiring picks up. Management’s already highlighted early signs of improvement in markets such as the UK, Spain, and New Zealand – areas where hiring confidence will likely return first.

On basic measures, the shares look cheap, with a price‑to‑book (P/B) ratio of around 0.55 and very low sales multiples. Analysts’ models imply strong earnings growth from this depressed base, which is why some see recovery potential if trading normalises.

Plus, while debt’s risen, key ratios still look manageable, with a debt‑to‑equity ratio of about 0.90 and a current ratio above 1.

But we shouldn’t gloss over the risks. Earnings are in freefall, the dividend is on ice, and recruitment’s a highly cyclical business. Things could get worse if the global economy slows further.

Considering the negative ROE and high leverage, there’s always a chance the shares could fall further before any recovery appears.

Other penny stocks to watch

Low‑priced stocks can offer good value, but in Robert Walters’ case, the risk for me looks a little too high right now. Personally, I’d rather look at smaller names where the growth story’s already coming through.

For example, Frenkel Topping Group trades at around 48p with revenue up 16.8% year on year, helped by rising funds under management in its specialist advisory business. Or, if you prefer income, Macfarlane Group sits near 61p and offers a forward dividend yield of roughly 5.8%, backed by a long record of regular payouts.

And those are just two of many UK penny stocks I’ve been watching lately.

Whatever you pick, diversification matters. Even if you lean towards income stocks, it’s sensible to have some growth names alongside them. That way, your portfolio isn’t relying on one type of stock or sector to do all the heavy lifting. 

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Operating profit fell 80% in 2024 to £5.2m, with an earnings per share (EPS) loss of 9.1p. The share price has crashed 79% since a peak in early 2022.

But the company maintained its 2024 dividend at 23.5p per share “in view of balance sheet strength“. Net cash of £52.5m is enough to cover that operating loss 10 times over.

Analysts have the dividend holding steady for the next few years too — even though forecast earnings won’t come close to covering it this year or next. But if these predictions come true, we could see cover by 2027 — only about 1.1 times, but back on the right side.

Primed for a cut?

Do big investors have confidence in Robert Walters’ recovery and trust the dividend prospects? If they did, surely they’d snap up the shares and lock in that big dividend yield, wouldn’t they? The price collapse shows that’s not happening.

The company’s strategy is not entirely clear. A Q1 update in April reported net fee income down 16%. It spoke of challenging conditions, limited visibility, macroeconomic uncertainty…

Other than keeping a tight rein on costs, I’m not sure the plan is to do much more than just wait for things to get better. But that might actually be what’s needed.

Expecting ups and downs

This business is cyclical, and it can come to a near halt when times are bad. But if you know that, then maybe just build up enough cash to be able to sit out the down spells? Robert Walters does seem to have mastered the cash side of things.

Why would City investors shy away if that’s what’s happening? Well, maybe they’re just not interested in a small company with a market cap of only £120m. With the sums the big players have to invest, they’d only be able to make pocket money at best.

What might turn things round? The next trading update is due on 15 July, followed by 2025 half-year results on 31 July. Will we see signs of a profit upturn for the full year? Maybe even a move back towards positive EPS while analysts expect another per-share loss this year?

Small-cap unpredictability

If the outlook appears to be brightening, I wouldn’t be surprised to see investors start to get back on board. And more positive noises about the dividend could really provide a confidence boost.

But let’s get back to the key risk, which is not a small one. We need the company to have enough cash to keep paying the dividends until earnings get back on track to cover them. Otherwise, shareholders might have to take a hefty dividend cut on the chin.

The small-cap investor in me thinks this has to be a risk worth considering.

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I think £586.85m market cap Robert Walters (LSE:RWA) and Somero Enterprises (LSE:SOM), which has a market cap of £308.22m, are two UK small-cap stocks that could give me good returns on my money in the long run.

UK small-cap stock #1

Robert Walters is a specialist professional recruitment consultancy with a global presence. It focuses on finding and placing permanent and shorter contract staff for clients in the finance, technical, legal, sales marketing, and supply chain industries. It does this on request from firms, but also companies have outsourced their human resource department to Robert Waters, including payroll services.

The global pandemic was complex for Rober Walters. Jobs were lost during the pandemic and new hires dried up in all but a few industries. This explains the drop in 2020 revenues. However, revenues for the 2019 fiscal year also fell. But, I do note that the job market was tight in 2019; unemployment had fallen to its lowest levels since 1969 in the US.

Nonetheless, 2020 was not as bad as it could have been for Robert Waters. It pivoted to bio-sciences, logistics, gaming, and fintech recruitment, which was a more buoyant market. A new NHS contract was won in 2020, which should provide good recurring revenues. Despite the turmoil of the pandemic, Robert Waters has survived relatively unscathed and is well-positioned to participate in the next hiring cycle.

I think Robert Walters is a quality company. It has consistent operating margins and generates good amounts of free cash flow. The company has been consistently profitable since 2015, although profits dropped sharply in 2020. The market seems to agree, as it has bid up its price from 237p at the depths of the 2020 crash to 762p now.

It’s worth pointing out that the Robert Walters share price has recently set a new all-time high. Further outperformance does depend on the jobs market being ready for lots of movement and new hires. I think it is, so I am considering adding Robert Walters to my portfolio.

UK small-cap stock #2

Somero provides equipment to install high-quality concrete floors “faster, flatter, and with fewer people” to customers in over 90 countries. It also provides training, education, and support to its customers. It has several innovative product lines dealing with different cement applications.

Similar to Robert Walters, the Somero share price is close to its all-time high of 579p. This stock is in favour with the markets at the moment. And it is a quality company with solid and high margins for its industry, good free cash flow and earnings growth, and a track history of organic growth in revenues.

I think we are at the start of an upcycle in the contraction industry. This will benefit Somero. However, it’s worth noting that, like Robert Waters, Somero is a cyclical company. If the cycle does not turn up like I think it will, the market will notice and punish the Somero share price.

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Legendary growth investor Jim Slater used the PEG ratio — which looks at earnings growth — to find fast-growing companies to invest in. I’ve been using the same technique to find new stocks for my portfolio. Here are my three top picks for August.

A long-term winner?

Recruitment group Robert Walters (LSE: RWA) specialises in supplying professional staff for sectors such as finance, law, and IT. Profits are bouncing back fast and are already above 2019 levels.

I think one factor that’s helped the group’s recovery is its geographic diversity. More than 70% of fee income comes from outside the UK, with 45% from the Asia Pacific region. This means that, unlike some rivals, Robert Walters isn’t dependent on just one geographic market.

Of course, recruitment is cyclical. Companies are quick to stop hiring when the economy slows. That’s always a risk. But Robert Walters had more than £120m of net cash at the end of June, providing a healthy safety net.

Robert Walters’ PEG ratio for the next 12 months is just 0.5. That reflects strong earnings growth forecasts. I think this growth stock has further to go.

Profiting from the logistics boom

US firm Somero Enterprises (LSE: SOM) designs and sells machinery to produce perfectly flat concrete floors. The company is a market leader in this sector, especially in the US.

Demand is very strong as modern warehouses need flat floors for high racking systems and robotic picking. Growth in internet retail has made this even more important.

The big risk here is that demand will slump in a recession — Somero suffered badly in 2008/9. A slowdown seems likely to me at some point, but I don’t see any cause for concern just yet. In July, Somero said trading in its core US market was ahead of expectations so far this year.

Somero’s pre-tax profit has risen from £1.2m in 2012 to £24.6m in 2020. There’s plenty of cash on the balance sheet and the company has a record of paying generous dividends.

I think this well-run business could have further to go. It’s a share I’d be happy to buy.

A below-the-radar growth stock

Lender S&U (LSE: SUS) provides financing for used car buyers and property loans. The founding Coombs family still own a majority of the company’s shares and the business is overseen by chairman Anthony Coombs.

Most of S&U’s profits come from its car finance business, which targets customers with imperfect credit ratings. Historically, this has been very profitable, with an operating margin of more than 40%.

Admittedly, lenders like S&U sometimes suffer from a surge of bad debt during recessions. This is a risk here, in my view, especially as the company targets borrowers who can’t get mainstream loans.

However, this family-run business has been operating successfully since 1938. Broker forecasts suggest that the group’s earnings will by around 35% in both 2021 and 2022. With a PEG ratio of just 0.5 and a tempting 3.6% dividend yield, I would be happy to buy S&U today.

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The investment trust

I’ve been bullish on Scottish Mortgage Investment Trust for some time. The main reason is that it has a proven long-term track record, which has consistently delivered. I like to back a stock where there’s evidence that the business model is working.

In this case, the fund managers have demonstrated their stock picking abilities over several years. Since the portfolio has a tech bias, last year was a stellar year for the investment trust. Of course, there’s no guarantee this past performance will be replicated in the the future. But it gives me some encouragement that the fund managers know what they’re doing.

I also think this is a top UK share to buy right now because of the portfolio diversification. I’ve mentioned this before that I’m getting exposure to listed companies but also a pool of private tech companies.

It’s worth noting here that as a retail investor, it would be hard for me to invest in unlisted companies directly. But I can get this exposure through Scottish Mortgage. What’s more these private companies have the potential to become public. And there are several examples of this happening in the trust. Again, I put this down to the investment skills of the fund managers.

Earlier this year, the tech sell-off hit Scottish Mortgage shares and this could happen again. As I said, there’s no guarantee that its previous impressive performance will continue in the future.

The recruiter

On Wednesday, Robert Walters announced its second quarter trading statement for 2021. This comes ahead of its half-year results due on 27 July.

I’ve been bullish on this stock and the Q2 2021 numbers were strong. Trading momentum across all regions during the period was positive. The recruiter even said that “profit for the full-year is now expected to be significantly ahead of the level signalled in our recent 11 June trading update.”

As a reminder, it stated in its last announcement that it expected full-year profit before tax “to be materially ahead of current market expectations.” So the fact that the company still remains on track is encouraging to me. It also indicated that the interim results at the end of this month should be positive too. But of course, this is just me speculating. I’ll have to wait and see.

What I also like about Robert Walters is that it’s in a strong financial position. The balance sheet looks in good shape with a net cash position of £113m as at the end of June. Couple this with a good economic recovery following the pandemic, and I think this should push the stock price higher.

But if there are any Covid-19 delays, then businesses aren’t likely to recruit employees, which could impact the Robert Walters share price. Companies could also be cautious on hiring as the coronavirus variants continue to spread.

Despite these concerns, I think this is a great UK share to buy for my portfolio right now.

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Robert Walters had risen to its most expensive since August 2018, at 797.7p, earlier in the session.

Robert Walters’s profits jump

In a trading update covering the second quarter, Robert Walters said gross profits soared 31% at constant currencies to £89m. It commented that “trading momentum continued to accelerate through the second quarter,” and that activity in June was “particularly strong.”

Gross profits had fallen 11% during the first three months of 2021. But robust trading between April and June meant profits were up 8% year-on-year for the first half.

In its core Asia Pacific market, second quarter gross profit ballooned 48% at stable exchange rates to £40.9m. Each of its markets in the region enjoyed net fee growth above 25% in the period. And net fee income in Malaysia and Mainland China more than doubled year-on-year.

In Europe (excluding the UK) profits climbed 26% to £23.4m. Meanwhile, gross profits in Robert Walters’ other international markets rose 20% to £6.7m. In the UK, profits rose by a solid-if-unspectacular 9% to £18m.

A bright outlook

Chief executive Robert Walters said: “Due to a very strong close to the quarter… profit for the full year is expected to be significantly ahead of current market expectations”. He added that “we will be investing in additional headcount in those geographies and disciplines showing the strongest signs of sustained growth. We enter the second half of the year with cautious optimism and confidence that we are very well positioned to continue to take advantage of market opportunities as they arise.” 

Wincanton spooks over driver shortages

News coming out of Wincanton (LSE: WIN) wasn’t nearly as reassuring for UK share investors on Wednesday. Consequently the company has fallen 9% to 430p per share and away from yesterday’s record peaks.

Wincanton’s share price is still up nearly 140% over the last year. But it’s fallen today after the firm warned that while “positive momentum” has continued in the early part of the new financial year, it added that it is “mindful of the sector-wide pressures related to the availability of drivers.”

The logistics giant said that it is recruiting permanent employees and accelerating staff training to address the problem.

“Significantly” higher profits

Strong trading during the final six months of its last fiscal year (to March 2021) continued into the first quarter of financial 2022. The business has enjoyed “sustained growth and an attractive pipeline of opportunities in each of [our] four sectors,” it noted.

Wincanton is thus trading in line with expectations, it said, with profits “significantly” higher than they were in the corresponding quarter last year.

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#1 – Robert Walters

We got a quick trading update from Robert Walters (LSE: RWA) last week and its second quarter results are due on 7 July. Despite the short announcement, it was a good one.

The company indicated that “positive momentum” has continued through the first two months of Q2 2021. This means that “the board now expects profit before taxation for the full year ending 31 December 2021 to be materially ahead of current market expectations”.

The profits upgrade is clearly going to be welcomed by investors. And I reckon it could drive the British stock higher. The recruitment market is improving and I think this could continue as lockdown restrictions ease.

Most companies have have had hiring freezes in place during the pandemic. In fact, during the coronavirus crisis, costs such as labour were the first to go. So it hasn’t been a good environment for Robert Walters.

But as economies start to reopen, business sentiment is likely to improve, which means recruitment could increase. And the company is in a good position to capitalise on this.

Robert Walters also has a strong brand and operates a global business. The firm has a strong balance sheet and had a net cash position of £140m as at the end of March. It has also restarted its dividend payments, which income-hungry investors will be happy about.

The shares trade on a price-to-earnings ratio of 88x. So the stock isn’t cheap. This means that it could be sensitive to any Covid-19 setbacks.

#2 – Card Factory

Card Factory (LSE: CARD) shares were hurt when it released further details of its refinancing package. It turned out that the company needed to raise “net equity proceeds of £70m”. And investors didn’t like this.

The firm released its full-year results last week and I wasn’t surprised that the figures weren’t great. It’s worth noting here that the new CEO, Darcy Willson-Rymer joined in March. So it was his first review since joining.

The ship has a new captain and the bad news is now out in the open. The pandemic has been bad for Card Factory’s business. The numbers clearly demonstrate this. Both revenue and profitability took huge hits.

What’s also notable is that the company has had to borrow its way out of the crisis. In 2020, net debt as a multiple of EBITDA was 1.1x. But fast forward 12 months, and that figure has increased to 2.3x.

Most investors would shudder at this, but let’s not forget that the past 18 months have been unprecedented. Again, any Covid-19 setbacks could negatively impact the shares.

But I reckon the worst is over for the company and the British stock should rise from here. Most of its stores are now open and trading looks encouraging so far. While fewer customers are visiting its shops, they are spending more. If things continue to improve, then Card Factory should be able to service its liabilities. I’d buy now as I see a brighter future ahead.

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Riding the jobs recovery

Buying shares in London-listed recruitment stocks is a great way to ride the economic recovery, in my opinion. And I think Robert Walters (LSE: RWA) is a particularly-attractive reopening stock because of its dirt-cheap price. City analysts think earnings here will rise 180% year on year in 2021. This leaves the company trading on a forward price-to-earnings growth (PEG) ratio of just 0.2. A reading below 1 suggests that a UK share could be undervalued.

Data from the UK illustrates how strongly profits could be about to explode at Robert Walters and its peers. According to the Chartered Institute of Personnel and Development, employers in Britain — a territory responsible for a quarter of Robert Walters’ net fees — are planning to take on staff at their fastest pace for nine years.

I think this particular reopening stock is a great pick for long-term investors too. Asia is Robert Walters’ single largest territory, one which I expect to deliver mighty income growth as economic conditions there boom. But I have to remember that companies like this are only as good as the talent they are looking to find jobs for, however. And a brain drain among its candidate pool versus that of its rivals could hit profits hard.

Another top reopening stock to buy

The flight plan for Ryanair’s (LSE: RYA) recovery remains packed with risk. But I still think it could prove to be a clever buy, despite its current perils.

Covid-19 infection rates across much of mainland Europe have trended lower in recent weeks, leading to hopes that the Irish flyer’s planes could be back in the skies en masse before too long. But there’s a long way to go before the public health emergency is over and spikes like that currently being reported in Britain will be greeted with fresh dismay.

As a long-term investor though, I think Ryanair could be considered a very attractive reopening stock to buy today. Thanks to the €1.2bn Eurobond the company issued last month it retains one of the strongest balance sheets in the industry. I’m confident that it will have the financial might to overcome the Covid-19 crisis and to ramp up capacity quickly as lockdowns are phased out.

Passenger demand for low-cost plane tickets rocketed during the first couple of decades of the century. I’m confident that they will remain the driving force behind the wider aviation industry when the pandemic finally ends too. And this particular reopening stock has a considerable geographical footprint from which to exploit the market to its fullest.

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A fresh surge in Covid-19 cases and returning lockdowns in its markets could see trading at Robert Walters crumble. But right now the encouraging economic outlook in Britain and large parts of Asia Pacific (it sources two-thirds of net fees from these two regions) makes me believe that this UK share is an attractive buy. Chinese GDP soared by a record 18.3% in the first quarter.

Analysts think earnings at Robert Walters will soar 180% in 2021. This results in a rock-bottom forward price to earnings growth ratio of 0.2. Any reading below 1 suggests that a stock could be undervalued by the market.

Another cheap UK share to buy?

Another cheap UK share that’s enjoyed strong recent trading is Tesco (LSE: TSCO). Thanks to its market-leading online operations this FTSE 100 share has enjoyed a roaring trade during Covid-19 lockdowns. Sales here rose 7% during the 12 months to February.

Coronavirus restrictions in the UK are being steadily unwound as vaccine rollouts bring infection rates down. But this doesn’t mean that grocery shoppers will log off en masse and charge back into the stores of industry disruptors Aldi and Lidl. Firstly, the pandemic has created a mass of new e-retail customers who will remain loyal to Tesco’s online proposition even as the public health emergency recedes.

And secondly, changing attitudes towards health and hygiene could solidify the popularity surge of online grocery over in-store visits. A survey from shopping list app Ubamarket shows that 57% of Britons say that “their perception of what it is to feel safe in supermarkets and retail venues has permanently shifted”. And 52% of citizens consider supermarkets to be “the most infectious places to contract coronavirus.”

Tesco’s share price: low for a reason?

Right now the Tesco share price looks really cheap on paper. City analysts think earnings here will soar 147% in this financial year. This creates a forward PEG ratio of just 0.2.

That being said, I still not tempted to buy this cheap UK retail share. I think Tesco’s share price is low because it still faces colossal competitive pressures that will likely worsen. The rapid expansion of Aldi and Lidl threatens to pull more and more shoppers out of Tesco’s stores. Meanwhile all of the FTSE 100 firm’s established rivals, like Sainsbury and Morrisons, are improving their own online operations to exploit the rise of e-commerce. With Amazon getting in on the action, too, and the German discounters also dipping their toe into the online grocery segment, I believe buying Tesco shares is a risk too far for my portfolio.

The post Tesco share price: should I buy these 2 cheap UK shares today? appeared first on The Motley Fool UK.

To me, this confirms that the recruitment market is improving. In fact, I reckon the hope of a recovery has been one of the drivers behind the increase in the Robert Walters share price. But for now, I’m watching the stock, especially when it’s sitting on a high price-to-earnings (P/E) ratio of 80x.

Trading so far

I’m stating the obvious here, but of course the pandemic was going to have an impact on a recruitment business.

But Robert Walters’ use of technology meant that most of its employees could work remotely during the pandemic. At least the business did not come to a grinding halt.

However, when companies are faced with challenging times, costs are the first in line to be cut. For many firms this means reducing the number of employees. This is not news Robert Walters wants to hear.

Trading activity has been down across all of the recruiter’s geographical regions. I don’t think that’s a surprise. After all, the coronavirus crisis has been a global one. In fact, Asia Pacific is Robert Walters’ largest region by net fee income.

But I think the main point here, is that the company is starting to see positive trading momentum, which has continued through the first quarter of 2021. As I previously mentioned, it has even indicated that profit is likely to be ahead of expectations. I reckon that will boost the Robert Walters share price in the short-term.

Strong financials

I think it’s worth highlighting that the recruitment company is in a strong financial position. It has an impressive balance sheet, with net cash of approximately £140m.

In fact, Robert Walters did not need to raise any external finance to weather the coronavirus storm. I think that’s impressive and perhaps justifies the stock being so expensive.

It’s encouraging to see that it reinstated dividend payments in November. That further emphasises the company’s strong financial position, I feel. It’s paying a dividend because it can afford to.

My concerns

According to Robert Walters, recruitment has seen some positive momentum so far. But I take this with a pinch of salt. I don’t think the recovery will mean companies will start hiring straight away.

It’s likely that firms will be taking a cautious approach going forward. In fact, most have been operating as leaner entities during the pandemic. With new and extended lockdowns still occurring across the world, I think recruitment markets are likely to remain challenging.

This could impact the Robert Walters share price, especially when the stock is trading at a high P/E ratio. This means that the shares are likely to be very sensitive to any delays or setbacks in companies hiring.

I’m nervous about dipping my toe in. So for now, I’ll be watching the stock closely.

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