Six value-based UK equity tips
23rd January 2015 16:49
Growth and income are highly desirable but, since share prices are determined by their popularity, we're unlikely to find shares that are both desirable and undervalued by following the herd.
Combining growth or income with value requires a contrarian mindset. Typically, good candidates face temporary challenges that have unnerved traders and weakened prices.
In making the following selections, I've used the earnings yield to gauge value. It's calculated by taking adjusted profit as a percentage of the market price of the whole enterprise (including net debt).
Earnings yield is a rough measure of shareholder return. The balance between income paid out and the amount retained determines whether we label the shares 'growth' or 'income'.
If a company invests well, profits will be higher in future, which is what we mean by growth. Investors will pay more for growth shares, but in doing so they are taking a calculated risk.
Income investors take a risk too, but the bar is a little lower. The company must remain sufficiently profitable to pay the dividend, and preferably increase it.
My income selections each paid out dividends of just over 4% of their share prices in their most recent financial years, and their prospects for sustaining the dividend are good. My growth picks are all highly profitable.
Value-based growth
365p; earnings yield 7%; dividend yield 1%
Quirky market research company BrainJuicer is teetering on the cusp of value, even if growth in future is restrained. Its focus on 'Juicy' products, which predict the effectiveness of advertisements and measure brand awareness using the techniques of behavioural science, promises more, though.
These are different from the traditional methods of much larger rivals, and judging by the company's high levels of profitability, they're in demand.
3,285p; earnings yield 7%; dividend yield 1%
Family-owned Goodwin has grown strongly for decades, manufacturing giant valves for oil and gas pipelines, rigs, refineries and other applications in the energy, chemicals, fertiliser and water industries.
Subsidiaries also manufacture steel castings and radio antennae, and process minerals used in casting. Declining oil prices may lead to lower investment by oil producers, limiting growth in the short term, but the company's pedigree should prevail over the cycle.
135p; earnings yield 8%; dividend yield 2%
FW Thorpe, another business controlled by its founding family, passed a significant milestone in 2014, when sales of LED lighting exceeded sales of traditional technologies.
The company has successfully grown through years of transition, while financing the development of new LED products and maintaining older lines. As LEDs become dominant, the cost of maintaining two product ranges should fall, contributing to profitability and growth.
Value-based income
120p; earnings yield 9%; dividend yield 4%
Building products manufacturer Alumasc has an attractive niche strategy focused on products that reduce the energy cost of buildings; but it also operates two engineering businesses - one of which, Alumasc Precision Components (APC), has been loss-making in recent years.
In October APC was put up for sale. Although Alumasc cut its dividend in 2012, APC and Alumasc are on sounder footings now.
160p; earnings yield 11%; dividend yield 4%
Exhibition organiser ITE is weathering a geopolitical storm. More than 60% of revenue in 2013 came from Russia, and 6% from Ukraine. During past crises, though, ITE has demonstrated its ability to prosper in Russia.
Political risks are mitigated because its businesses are incorporated locally, and economic risks are reduced by a flexible cost structure, which allows ITE to keep events profitable when demand falls.
375p; earnings yield 7%; dividend yield 4%
Wine seller Majestic has an emphatic history of profit and dividend growth, but its half-year results in November revealed unusual declines in profit and turnover.
Traders fear competition from supermarkets and direct sellers may reduce Majestic's profitability in future, but the company retains many of its strengths and the dividend should be safe.
Share price information as published in Money Observer's January 2015 edition.
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
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