As an investor looking to build his wealth over decades, I’m naturally drawn to quality growth stocks to buy and hold. The lure gets even stronger whenever I’m given a chance to load up at reduced prices. With geopolitical tensions rising, I think we could be entering such a period now. 

With this in mind, here are three top-tier titans I’ve got my eye on. 

Croda International

Shares in chemicals firm Croda International (LSE: CRDA) are down almost 30% year-to-date. That’s an awfully big drop for such a great company. While I’m not sure I’d buy just yet, I do get the sense that opportunity is knocking increasingly loudly. 

For the uninitiated, Croda has been around for almost a century. It produces ingredients for manufacturers in the home care, beauty, personal care, and fragrance market. It also operates in the Life Sciences space (providing solutions to protect crops, for example). I can’t see either of these markets ceasing to exist, even if Croda has struggled to grow profits recently. 

On the downside, the shares still look highly valued at 28 times forecast earnings. That’s a bit higher than the company’s five-year average P/E. With investors showing a penchant for (possibly-lower-quality) stocks on cheaper valuations right now, I wouldn’t be surprised if there was more selling pressure ahead.

It’s a bit expensive for me at present, so it stays on my watchlist for now. 

Next

FTSE 100 clothing firm Next (LSE: NXT) is another company whose share price has been struggling. A 15% drop in 2022 so far leaves the stock sitting at a 52-week low and changing hands for just 12 times earnings. That’s a low valuation for a firm that has built a reputation for consistently great returns on capital and fat margins.

Then again, it’s worth considering the wider context. With higher prices pushing many in the UK to watch their non-essential spending, I wonder if things could get worse before they get better. Next month’s Q4 numbers will be pivotal in determining how much the business is suffering. Recent activity suggests investors are already bracing themselves for a few nasties.

Under the stewardship of Simon Wolfson, there’s no doubt in my mind that Next is one of the better companies in the FTSE 100. I’m also convinced it can and will bounce back from this sticky patch. 

Even so, I’m inclined to hold off buying for now. 

Auto Trader

A final FTSE 100 growth stock I’m keeping tabs on is Auto Trader (LSE: AUTO).

A beneficiary of the global shortage in semiconductors and, subsequently, new vehicles, buyers have been flocking to its site even more than usual. Indeed, the clamour for used motors sent the share price rocketing last November.

Unfortunately, the very same stock is down 14% year-to-date. Some profit-taking is understandable. Like Next, however, I wonder if demand could soften as inflation places huge pressure on discretionary incomes. That’s even if supply chain issues are resolved.

Having said this, a P/E of 25 is cheaper than digital peers such as Rightmove and considering its dominance of the industry in which it operates. As such, I’d be prepared to buy Auto Trader hand over fist if things get worse over the next few months. Just like this top investment trust.

The post 3 ‘no-brainer’ FTSE 100 growth stocks to buy if markets keep falling appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Auto Trader, Croda International, and Rightmove. 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.

Sadly, I’m not one of those shareholders, aside from my holding via Scottish Mortgage Investment Trust. Should I be taking a leap of faith and buying the shares myself?

Tesla stock: worth the risk?

There’s certainly no shortage of reasons for thinking the Tesla share price can continue ascending. The company has quickly become the poster child of the electric vehicle revolution. And thanks to the headlines generated by Cop26, our adoption of these cars may be even swifter than previously thought.

Despite past concerns, the company’s financial situation is clearly improving as well. Tesla’s latest Q3 update revealed a 57% rise in revenues to $13.8bn. Net income also hit $1.62bn — almost 400% higher than over the same period in 2020. 

Having said this, it’s also not hard to find reasons — both general and specific — for steering clear. 

Even though there’s no rule to say they can’t keep rising, US stock valuations are looking very frothy indeed. And with businesses across the globe struggling with supply chain disruption and higher costs, the risk/reward trade-off looks increasingly unfavourable for tech stocks in particular.

Musk’s behaviour also continues to raise eyebrows. Only today, it was confirmed that the visionary leader had sold $5bn of shares in his own company after conducting a poll on Twitter. This move has worried investors and helps to explain why Tesla stock has fallen 13% in value in the last five trading days.

Naturally, Musk won’t care. As a Fool with finite capital, I can’t afford to be so relaxed.

Better buy?

Of course, Tesla isn’t the only way of getting exposure to the automotive industry. Actually, I think online marketplace Auto Trader (LSE: AUTO) might offer a far more comfortable ride.

Today, the FTSE 100 member announced it had achieved its best-ever set of six-monthly revenue and profits figures. At £215.4m, the former was 82% above that achieved over the same period in 2020. It was also 15% above that logged in the year before the pandemic struck. Helped by record spending by retailers, operating profit soared 121% to £151.7m, with margin rebounding to a staggering 70%. 

While Tesla’s crown may slip eventually, I’d say AUTO’s ongoing dominance looks more assured. Today, it reported a 14% increase in ‘cross-platform minutes per month’ to 633 million. This represents over 75% of the whole market. Put another way, car buyers spend almost nine times more time on Auto Trader’s site compared to its nearest competitor. 

One for the traders

Taking all this into account, it’s perhaps no surprise that the AUTO share price soared over 11% in early trading, justifying my bullish call last month.

While this pales in comparison to Tesla’s recent performance, the fact that the £6bn-cap’s business model is based on recurring revenues lends it far better visibility, in my view. What’s more, the company’s ability to serve all vehicle buyers gives it a defensiveness that Musk’s company lacks.

Chuck in consistently high returns on capital and a bullet-proof balance sheet and I continue to regard AUTO as a great UK growth share. As superb as returns have been, I’ll leave Tesla stock to the traders. But I’d buy AUTO.

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Paul Summers owns shares in Scottish Mortgage Investment Trust. The Motley Fool UK has recommended Auto Trader. 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.

November looks like being a busy month for investors with a large number of the UK’s biggest companies providing updates on trading. Here are three FTSE 100 firms whose statements I suspect will be positively received.

Huge demand

Online vehicle marketplace Auto Trader (LSE: AUTO) is down to reveal its latest set of half-year numbers of 11 November. Based on the ongoing scramble for second-hand motors, due to the global shortage of computer chips for new cars, I’m struggling to imagine why the figures will be anything less than impressive. The question I’m asking therefore, is whether all this positivity is already baked into the share price.

I’m not so sure it is. AUTO’s stock is up just 5% in the last 12 months and currently changes hands for under 26 times earnings. Yes, that’s hardly cheap. However, I still think it’s reasonable for a company that, like its property equivalent Rightmove, has a clear stranglehold on its market. According to the firm, browsers spend seven times more time on its site than their nearest competitor.

Naturally, there will come a time when supply chains are fixed and market dynamics change. The potential for a protracted period of inflation may also push potential buyers to delay their next car purchase. Regardless, consistently high returns on capital and sky-high operating margins keep me bullish on AUTO for the long term.

Contrarian pick

A second FTSE 100 member that could push higher next month is luxury brand Burberry (LSE: BRBY). While I’m wary of being biased here (I hold the stock), I do think the recent confirmation of a new CEO has helped to reassure an already-skittish market.

If this can be backed up with some comforting but not necessarily outstanding interim numbers on 11 November, BRBY shares may be able to breach the 2,000p barrier. Now that its physical store estate is back up and running, I’m inclined to be optimistic.

Of course, a full recovery will take time. It will also depend greatly on what the fashion world/market thinks of Jonathan Akeroyd’s plans for the brand when he takes up his post in April. In the meantime, a resurgence in Covid-19 infections and hints of a return to lockdowns could put the brakes on any progress. 

So while I believe the stock could move higher next month, I’m also keeping my expectations in check.

FTSE 100 value stock

A final FTSE 100 stock I’ll be watching is insurance firm Aviva (LSE: AV). Its shares are up 51% in the last 12 months as (some) confidence has gradually returned to the UK economy. Investors also appear to be impressed by CEO Amanda Blanc’s strategy for streamlining the company. Recent news that it achieved its best half-year sales in General Insurance for a decade was warmly received too.

However, like AUTO and BRBY, nothing can be taken for granted. Regardless of a bullish Q3 update on 11 November, the shares could still slide on global growth concerns. This includes the drawback of holding a stock whose fortunes will always be determined to some extent by wider market sentiment.

Notwithstanding this, it could be said that AV’s current valuation takes this into account. A P/E of less than nine times forecast earnings looks like a bargain to me. A chunky 5.6% dividend yield, based on analyst projections, is also attractive as higher prices bite.

The post 3 FTSE 100 stocks to buy before November appeared first on The Twelfth Magpie.

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Paul Summers owns shares in Burberry. The Motley Fool UK has recommended Auto Trader, Burberry, and Rightmove. 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.

FTSE 100 market leaders

The first stock on my shopping list would be Auto Trader. Operating completely online (the print version was ceased years ago), the FTSE 100-listed vehicle marketplace is the clear market leader. Apparently, more than 75% of all time spent looking at car adverts is on the company’s site. I suspect this figure might be even higher now following the scramble for second-hand motors due to the global chip shortage.

The other leader is property portal Rightmove. Like its automotive equivalent, this FTSE 100 constituent is the go-to destination for buyers and renters. For years, competitors have tried but failed to take meaningful market share, suggesting RMV’s brand serves as a great economic moat. Throw in a bulletproof balance sheet and (like Auto Trader) spectacular returns on capital, and RMV would be a compelling purchase for me.

There are still things to be aware of, of course. The vehicle and housing markets in the UK should moderate in time and could even plummet in the event of a serious economic wobble. Moreover, I don’t expect either company to ever be screamingly cheap, since quality rarely lacks friends. So I’d need to stay realistic with my target purchase price.

Luxury brand

Third on my list of FTSE 100 to buy is luxury brand Burberry. This may seem an odd choice, especially as the company still hasn’t recovered from the coronavirus crash. Moreover, the recent fall in retail sales in China doesn’t exactly bode well. After all, BRBY is hugely dependent on shoppers continuing to buy into its highly-coveted brand.

As an existing owner, I’m not worried. Burberry’s long history (and sound finances) clearly mark it as one of the FTSE 100’s most resilient members and one I’d continue to buy in a correction.

Notwithstanding this, it’s important for me to monitor just how much exposure I’d have if I continued to buy on a correction. Too much money in one company’s risky. I want to sleep at night!

Then again, all this may prove immaterial. I still reckon BRBY will be bought out before long. 

Priority buy

Last of my FTSE 100 buys would be a stock I once owned and stupidly decided to sell too soon. Health and safety tech firm Halma‘s share price has rocketed since. As I type, it’s up 36% in the last year. Anyone buying five years ago would have tripled their money. 

Still, a forward P/E of 50 suggests shares are now priced to perfection. Yes, Halma operates in a highly defensive sector. And yes, a multi-decade history of hiking dividends is nothing to be sniffed at. However, there comes a point when it’s wise to pull back from a purchase if I feel I’d be overpaying.

This is why the HLMA remains on my watchlist, for now. When the next correction inevitably comes, I want to have some dry powder ready… 

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Paul Summers owns shares in Burberry. The Motley Fool UK has recommended Auto Trader, Burberry, Halma, and Rightmove. 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.

Booming demand

I sincerely doubt the company’s next set of numbers (due in November) will be anything other than robust. Thanks to the global shortage of computer chips for new cars, the second-hand vehicle market is doing very well indeed. Actually, that’s something of an understatement. Based on a recent report from the Society of Motor Manufacturers and Traders (SMMT), the used car market has more than doubled over the last three months.

As the self-styled ‘go-to destination for car buyers’, it’s hard to imagine Auto Trader not benefitting from this activity. It lists around 485,000 cars on any day and estimates that more than 75% of all time spent looking at automotive classified sites is done via its platform.

Now, saying that trading has likely been good isn’t the same as saying that the share price will fly. It really depends on what the market is expecting. Based on recent performance, I wonder if it could be underestimating AUTO. 

FTSE 100 laggard

Auto Trader’s up 12% in the last 12 months. That’s certainly not a bad result. However, it’s a lot less than other FTSE 100 stocks. For comparison, Royal Mail has delivered a whopping 162% gain. Construction equipment supplier Ashtead is also up 107%.

Sure, this is like comparing apples with oranges. Nevertheless, it does provide an illustration of ‘opportunity cost’ in investing. It shows the sort of gains I could potentially lose out on when picking one stock over another.

In fact, even those adopting a passive approach and buying a FTSE 100 tracker would have done better. The top tier is up 16% since August 2020. Oh, and there would have been a dividend stream too. And, yes, this would have been higher than the yield on offer at Auto Trader. 

Notwithstanding all this, I’d still buy this stock for my own portfolio today for a number of reasons.

High-quality stock

Auto Trader’s shares trade on 27 times earnings. That’s certainly not cheap, but nor do I think it’s ludicrously expensive. As highlighted above, this is a business with a dominant hold on its industry. It’s been estimated by the company that 90% of consumers know what it does. If true, that’s very hard to replicate.

Moreover, this FTSE 100 constituent scores high for quality. Profit margins and returns on capital are seriously good, thanks to the relatively low cost of keeping a digital-only operation going. 

Third, AUTO’s finances are robust. As intended, the company has paid down its debt pile and now boasts a net cash position. That might not bother some investors, but it’s something I like to see. When the bad times come again, I want the stocks I own to be in a position of strength, not weakness.

No guarantees

Of course, this is the stock market and nothing can be guaranteed. A slowing economy could make AUTO’s share price volatile. One also needs to bear in mind that there will come a time when the chip shortage subsides and demand probably softens.

Then again, I don’t think this will be for while. As such, AUTO would definitely be among those shares I’d buy if I were creating a FTSE 100-focused growth portfolio today. 

The post 1 FTSE 100 growth stock I’d buy now appeared first on The Twelfth Magpie.

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

Here are three examples from the FTSE 100 I’d be happy to buy, regardless of what they say in June. 

Halma

Safety products firm Halma (LSE: HLMA) reports full-year numbers on 10 June. Based on its most recent trading update, I don’t think there’s much for existing holders (or prospective buyers) to worry about.

Back in March, the FTSE 100 member said it had made “good progress” over the previous six months. Thanks to a recovery in markets such as China, it predicted adjusted pre-tax profit would come in around the same level achieved in the previous financial year. It had previously expected it to be 5% below FY2019/20’s level.

Sure, value investors will baulk at the valuation (42 times forecast earnings). The opportunity cost of not investing elsewhere also needs to be considered. However, the essential nature of its various products and services gives Halma a defensiveness many firms in the FTSE 100 arguably lack. As such, I’m confident it’ll still outperform its index over the long term.

Factor in strong cash generation, sound finances and dependable dividend hikes and I continue to think this is a company to tuck away in the bottom drawer. 

Auto Trader

Also reporting full-year results on 10 June is online vehicle marketplace Auto Trader (LSE: AUTO). If recent new car sales are anything to go by, I think these could make for pleasant reading.

Of course, the prospect of good news doesn’t mean the share price won’t continue trading within the 500p-600p range it’s been stuck in. The potential for coronavirus variants to disrupt things going forward also can’t be ruled out.

Notwithstanding this, the beauty of Auto Trader is that everything’s online. Its status as a portal gives it the ability to navigate inevitable economic setbacks far more easily than bricks and mortar dealerships.

What’s more, a price-to-earnings ratio of 26 for FY22 looks reasonable. After all, Auto Trader consistently generates sky-high margins and returns on capital (ROCE). A commitment to focusing on the latter is one reason why star fund managers such as Terry Smith and Nick Train consistently outperform the market. 

Ashtead

A final FTSE 100 stock I’d have no issue buying next month is Ashtead Group (LSE: AHT). The construction and industrial equipment rental giant reports on trading on 15 June. Again, I don’t expect any nasty surprises. Back in April, the company said it expected full-year results to be “slightly ahead” of management’s previous expectations. 

When it comes to share price performance, the £22bn-cap takes no prisoners. Over the last year, Ashtead has more than doubled in value. By contrast, the FTSE 100 is up ‘just’ 14%. Some short-term profit-taking can’t be ruled out, but I wouldn’t expect this to last for long. Trading can only improve as more construction projects get the green light as economies open up from their coronavirus-induced slumber.

At 28 times forecast earnings, Ashtead can never be labelled ‘cheap’. As billionaire investor Warren Buffett suggested, however, it’s “far better to buy a wonderful company at a fair price than a fair company at a wonderful price.“

The post 3 FTSE 100 stocks to buy in June appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Auto Trader and Halma. 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.

When will prices reach their lowest point? The simple answer is that no one knows. And since knows one knows, I wouldn’t attempt to dissuade anyone from putting at least some of their spare cash to work in the near future. Better to start buying quality stocks when they’re already on sale, in my opinion, than miss out on the eventual recovery.

With this in mind, here are three I’d consider beginning to accumulate today. 

Auto Trader

One can’t deny that the car industry has rarely faced such uncertainty.

For me, however, vehicle marketplace Auto Trader (LSE: AUTO) has a number of the things I look for when sizing up stocks: a huge market share, great returns on capital employed, and sky-high margins. 

So, would I go ‘all in’ as things stand? Certainly not. Aside from the idea of a one-month bear market following a ten-year bull market feeling a tad optimistic, few people will be looking to buy a car for a while.

Notwithstanding this, Auto Trader has sought to reassure investors that it’s in a good place financially. At the end of February, it had £111m of its revolving credit facility undrawn. There are certainly firms out there with less headroom than this, which might go some way to explaining why the share price is down less than 20% over the last month.

If you believe the long-term investment case remains solid (and I do), this quality operation warrants a closer look. 

Howden Joinery

Despite only a few of its depots remaining open to serve trade customers, kitchen supplier Howden Joinery (LSE: HWDN) is another firm I’d have no trouble dipping my toe into as things stand.

With £267m net cash and an undrawn borrowing facility of £140m, the FTSE 250 member was in an excellent financial position at the start of 2020.

To help things further, investment has been scaled back, the share buyback programme has been suspended, and the final dividend ditched until the full consequences of the coronavirus for the business are known. This all makes perfect sense to me.

Naturally, paying the mortgage will take priority over a new kitchen in a coronavirus-induced recession but the strong relationships that Howden has built up with customers over the years should prove priceless.  

Boohoo

A third stock I’d feel comfortable buying at the current time is actually a former holding of mine – Manchester-based, fast-fashion giant Boohoo (LSE: BOO).

Although the company has still to update the market on the impact of Covid-19 on business so far, I sincerely doubt trading has remained as good as it was. To quote Next’s CEO, Lord Woolfson, “People do not buy a new outfit to stay at home“. 

True as that may be, I suspect Boohoo stands a far better chance of bouncing back to form given its strong brand and the relatively inexpensive price tags of its wares. The AIM star also had £245m in net cash on its balance sheet back in January. 

Boohoo’s stock is down 35% in one month. For anyone considering building a position now, I’m inclined to think the long-term returns will compensate for any initial period spent ‘underwater’. 

The post Markets may have further to fall but here are 3 growth stocks I’d start buying now! appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Auto Trader, boohoo group, and Howden Joinery 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.

That said, some companies are likely to be impacted more than others, no matter what the outcome.

High price 

Auto Trader (LSE: AUTO) is one I think is going to suffer from uncertainty more than most. As the country’s largest digital automotive marketplace, it relies on a healthy stream of interest from buyers and sellers to generate profits.

While the company has outperformed this year, the UK economy is stagnating, and this is already impacting car sales across the country. If the political stalemate continues, I think the situation is only going to get worse, and Auto Trader won’t be able to avoid the decline forever.

With the stock trading around 24 times forward earnings, there’s already a lot of optimism baked into the shares. If the company disappoints on growth, the stock could re-rate substantially as the rest of the sector is dealing at a median P/E of 1.5%. A dividend yield of only 1.5% doesn’t offer much consolation either.

Nationalisation concerns

If the general election results in a Labour majority, it could be bad news for the country’s utility companies. Labour has repeatedly promised to nationalise key industries if it gets into power. While I think the likelihood of this happening is low, it’s still not something I’d want exposure to in my portfolio.

That’s why I think it could be a good idea to sell shares in Severn Trent (LSE: SVT). Not only is the company at risk of nationalisation, but the stock also looks expensive.

Shares in the water business are currently dealing at a forward P/E of 19.1 and a price to book value of 4.7. The median book value of UK water companies is just 1.9, implying shares in Severn Trent are overvalued by around 1.5%.

There’s also a good chance the company’s 4.4% dividend yield could be under threat as well as regulators are taking a much stricter line utility providers’ allowed profit margins. All in all, it seems to me that the risks of investing in Severn Trent far outweigh the rewards here. 

Falling returns 

Finally, I wouldn’t want to own National Grid (LSE: NG) going into the general election. This company is exposed to the same nationalisation risks as Seven Trent, and is also under attack from regulators. 

The firm is currently battling Ofgem over its plans to connect the giant Hinkley Point nuclear power plant to the grid when it’s complete. Ofgem thinks the cost is £80m higher than it should be, but National Grid disputes this claim and is planning to provide further evidence to support its argument.

I think this battle shows how Ofgem is looking to get more value for money from suppliers, and that’s bad news for National Grid’s bottom line, as well as its 5.5% dividend yield. 

Nationalisation might not happen, and the company might be able to boost profits with other methods, but I think there are better investments out there that come with less risk.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Auto Trader. 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.

Despite decent numbers from its car services division, a 3.8% reduction in sales at its retail arm (blamed on a difficult backdrop and poor weather compared to last year) meant overall revenue dropped 2.9% to £582.7m over the six months to 27 September. While “in line with expectations,” pre-tax profit also declined 2.5% to £27.5m. 

Given the above, you might be asking why Halfords shares were up earlier this morning. The fact the company chose not to alter its guidance on profit for the full year (£50m-£55m) is likely to have helped. However, I believe a chunk of today’s early gains can probably be attributed to plans to focus even more on its Autocentre business through investment in more garages and mobile vans. This, management believes, will ultimately lead to “higher and more sustainable financial returns.”

Considering that people must keep their cars in good working order whatever the weather, this strategy makes sense (although I remain sceptical on how inclined drivers will be to switch mechanics). Nevertheless, becoming a market leader will require sacrifices.

As I speculated in September, the company announced today its final dividend this year would be reduced to 8p. The total dividend will then be lowered to 12p per share from FY21 onwards. While unsurprising, this development will clearly disappoint those invested for income.

Of course, you might argue that, at just 7 times forecast earnings, Halfords is simply too cheap to pass up. There might be something in this. However, with no certainty its strategy will work and sales of big-ticket discretionary products likely to remain under the cosh for a while thanks to Brexit, I think there are less risky options elsewhere.

One example would be vehicle marketplace Auto Trader (LSE: AUTO). As luck would have it, the FTSE 100 member also released half-year numbers this morning. And what great numbers they are.  

Motoring ahead

Revenue accelerated 6% to £186.7m in the six months to the end of September, along with a 12% increase in pre-tax profit to £127.7m. A quick glance at the stats helps explain why.

Cross-platform visits per month, at 51.2m, were 4% higher compared to over the same period in the previous financial year. The average revenue generated per retailer climbed 7% to £1,951 and the amount of physical stock jumped 10% to 481,000.

Although the vast majority of the latter was made up of used vehicles, CEO Trevor Mather pointed out that the site now lists “over 30,000 brand new cars” which were “viewed by 1.6m people in September alone.” To be clear, Auto Trader remains the clear market leader at what it does.

Looking ahead, the £5bn-cap said it was likely to meet growth targets for the full financial year, “despite ongoing market uncertainty.” As a sign of confidence — and in contrast to Halfords — it also raised its interim dividend by a little over 14%. 

The only downside to all this is that tapping into Auto Trader’s success comes at a hefty price (almost 25 times earnings before markets opened). Considering the company’s dominance, seriously high returns on capital employed, and improving finances, I’d be far more likely to buy a slice of this quality stock than the aforementioned market minnow.

The post A dividend cut isn’t the only reason I’d steer clear of this small-cap stock appeared first on The Twelfth Magpie.

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

Enter Pendragon

This is bad news for Pendragon (LSE: PDG), which sells both new and used vehicles, and offers after-sale service and repairs. Its share price crashed almost 10% today after the group unveiled a pre-tax loss of £32.2m, down from last year’s £28.4m profit, scrapped its dividend, and announced around 300 job losses. This Fool writer saw it coming.

Management admitted to a “challenging” first half as it moves to reduce its used car stock to more appropriate levels, both through “lower retail pricing and clearance through trade auction channels.” 

These necessary actions resulted in significant losses, made worse by a market-wide drop in used car values. At least the issue of stock levels has been largely addressed, management said, and it has taken measures to reduce the risk of a repeat.

Like-for-like group revenues rose by 2.9% to £2.45bn, but lower pricing ravaged profits. For example, used car revenue grew 3.7% but gross profit fell 26.1%.

Non-executive chairman Chris Chambers, who steps down on 1 October, warned that the rest of the year looks set to be challenging too. The group’s share price has now more than halved in the last year and, after five years of share price disappointment, today’s valuation of 3.9 times earnings will only tempt the bravest of bargain seekers. If we get a Brexit quick fix and avoid a global recession, Pendragon might just be worth a punt. That’s two big “ifs” though.

Auto Trader Group thrives

Not every company in the car industry is losing its grip. Classifieds advertiser Auto Trader Group (LSE: AUTO) has seen its share price accelerate 20% in the last year, as the group benefits from its market dominance and lack of a serious competitor. It remains the go-to name for those buying and selling used cars.

The lack of competition irritates many in the industry, but investors won’t be complaining, and will relish the high barriers to entry. Some say the FTSE 100 group is the motor industry’s answer to property portal Rightmove.

June’s full-year results showed both revenues and operating profits rising, the former up 8% to £355.1m, and the latter up 10% to £243.7m. The board also remains confident of meeting growth expectations, despite the challenging environment. 

Given those challenges, the £4.85bn group does look expensive at a forward P/E of 23.9 times earnings, and a PEG of 3.3. That said, its operating margins are a fat and juicy 68%, something you don’t see very often. City analysts expect earnings to grow a robust 7% this year, and 14% next. Auto Trader is clearly doing something right, Pendragon isn’t.

Conditions in the car industry are tough and look set to remain so, so I’m surprising myself by saying I reckon Auto Trader may well be a buy.

The post Got £1,000 to invest? Here’s one FTSE 100 stock I’d buy, and another I’d avoid appeared first on The Twelfth Magpie.

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• Is the FTSE 100 at risk from an overheated US stock market?

Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Auto Trader and Pendragon. 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.