Four cheap recovery stocks to buy now
By
Julie Dean Oct 30, 2009
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Each week, a professional investor tells MoneyWeek where she’d put her money now. This week: Julie Dean, fund manager with Cazenove Capital.
The recent recovery in British stock prices has been the fastest in modern history. This is especially true for many cyclical shares – fear has evaporated and valuations are high. Positive earnings surprises are now needed to justify prices, but we are sceptical about whether these are likely to be delivered. So, at this stage in the business cycle, we want stocks that can generate above average profits growth, or which just look too cheap.
Compass Group (LSE: CPG), a global contract caterer, looks good on both counts. A change of management has led to a big shake up in the culture of the organisation over the last two years. Margins are expanding again, despite reduced sales growth caused by rising unemployment. As a result, earnings forecasts have increased by more than 20%, yet the share price has done little.
Sales growth should now pick up as pressure on government budgets leads to more outsourcing business for Compass. That will also help improve margins. Once employment levels start to recover, the firm’s rising operational leverage should lead to higher profits growth than many analysts clearly expect. Indeed, the stockmarket reacted rather churlishly to the margin improvement Compass reported in the third quarter. We’re encouraged by the group’s latest announcement, which signalled a further improvement in margins for the final quarter of the year.
Recent stockmarket strength presented an opportunity to take profits on many of our financial shares. But life assurance giant Standard Life (LSE: SL) is one exception – we’ve felt compelled to buy it. To tell the truth, the firm is a bit dull. But that’s why it’s been overlooked by the market, despite a solid balance sheet. Its business model is the closest, in terms of large insurers, to a fund manager, so it is well placed to cope with future regulatory changes. Revenues are built on fee-based income, which should translate into a strong earnings rebound as the market picks up. Yet the shares have been poor performers and have lagged the stockmarket. That’s despite offering the highest yield in the sector – just over 5% – from a growing dividend base (not something most of its peers can boast).
My third pick, Abcam (LSE: ABC), is an out-and-out growth story. Its business combines medical technology with internet retailing – think of it as the Amazon of antibody sales. Abcam’s two-way internet platform collates antibody peer reviews, affording scientists valuable product research. In a high volume business this information helps Abcam supply the right product and keeps stock levels tight. And that’s pushing its growth rate ahead of the rest of the market. As demand increases from new markets in Asia, it should continue comfortably to deliver above-average returns.
My final pick is insurance underwriter Omega (LSE: OIH). This firm has changed beyond all recognition over the last 18 months, from being a small Lloyd’s syndicate manager to an international business. That’s involved issuing new equity, which has weighed on returns and, consequently, the share price. However, the firm’s underwriting performance is second to none in the industry. As a result the profit potential for this business is substantial and the return on equity could jump very quickly. On a forward p/e of 12, this share looks cheap.
The stocks Julie Dean likes
| 12-month high | 12-month low | Now |
|---|
| Compass Group |
405p |
235.5p |
388.5p |
| Standard Life |
288p |
123.5p |
227p |
| Abcam |
959p |
440p |
925p |
| Omega |
160p |
117p |
125p |
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