If highly-valued equities miss expectations, the resulting exodus of investors can cause the share price to crash.

With this being the case, when I look at shares in Morrisons (LSE: MRW), I’m immediately put off the business due to its high valuation. 

Overpriced 

At the time of writing, shares in the retailer are trading at a forward P/E of 17.1, which is what I would consider a premium growth multiple. Only double-digit earnings growth would justify this valuation in my opinion. However, the City is forecasting a slight decline in earnings per share for fiscal 2019.

Not only does the share price look expensive compared to its growth potential, but the stock is also dealing at a premium to peers.

Shares in Tesco, for example, are changing hands at a forward P/E of 15.7. I would argue that it deserves a premium valuation over the Morrisons share price because not only is the company significantly bigger, it is also forecast to report earnings per share growth of 27% for fiscal 2019 and 21% for fiscal 2020 eclipsing Morrisons’ meagre growth.

The one advantage the Morrisons share price does have over its larger peer is a more attractive dividend yield of 3.9%, but in my opinion, this is not enough to justify the high valuation premium.

Overall, I would avoid the Morrisons share price for the time being on valuation grounds and buy toymaker Character Group (LSE: CCT) instead.

Remarkable business 

To me, Character immediately stands out as a high-quality business. Revenue has grown at a steady rate of 10% per annum for the past six years, and operating profit has exploded from just £7.5m in 2014 to £11.7m for 2018. Return on capital employed — a measure of profit for every £1 invested in the business — hit 37% in the company’s last financial year, putting it in the top 5% of the most profitable companies listed in London.

Over the past 24 months, Character has faced some significant headwinds, such as the collapse of toys retailer Toys R Us — a major customer — and the general UK retailing environment. 

Nevertheless, despite these challenges, the company has continued to push ahead. In its post-Christmas trading update, the group informed investors that products continue to sell well throughout the Christmas period and every region the business sells to is seeing growth, apart from the USA. 

With this being the case, it looks as if the business is firmly on track to meet City growth forecasts for the year. Analysts have pencilled in earnings per share of 47.6p, which implies the stock is trading at a P/E of 11.3 currently. 

For such a profitable company, I think this modest valuation undervalues Character. As a bonus, there is also a dividend yield of 4.7% on offer. Overall, this remarkable firm looks to me to be a much better buy than the Morrisons share price.

The post Why I would sell the Morrisons share price and buy this remarkable toymaker instead appeared first on The Twelfth Magpie.

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

While that’s come to pass, sentiment towards the housing sector has also been shaken by Brexit fears, and the Persimmon share price has declined by 23% since June’s peak. Comments from Bank of England governor Mark Carney haven’t helped, after he reportedly suggested that house prices could fall by around a third should we face a disorderly exit from the European Union.

That was a worst-case scenario, but it’s the kind of thing that can seriously raise uncertainty — and uncertainty causes share prices to wobble.

Warning

A profit warning from Crest Nicholson this week further shook the sector, with the typical second-half pick-up in demand for homes in London and the South of the country appearing not to have materialised this year. But I agree with fellow Fool Peter Stephens’ suggestion that Crest Nicholson has a significant safety buffer, and I don’t see its dividend as coming under any real pressure.

I think the same is true at Persimmon, which is awash with surplus capital — so much that, with special dividends included, forecasts are suggesting total dividend yields for this year and next of better than 10%. With forward P/E multiples of around eight, I see a safety margin here too.

Still, while Brexit negotiations continue with their appearance of stumbling from one obstacle to another on a daily basis, I can see house-builder price weakness continuing — and it could carry on for some time. But to me that suggests possibly better buying opportunities.

Overlooked star?

If forecasts prove accurate, the dividend from Character Group (LSE: CCT) will have more than trebled in five years — from 7.25p in 2014 to 23p in 2019. That suggests yields of 4.4% this year and 4.8% next, and with the shares on P/E multiples expected to drop to 10 by 2019, I’m wondering why the market isn’t more interested. 

I’m guessing it’s the 10% EPS drop predicted for this year that’s putting people off, after several years of solid growth, but I’m thinking a 19% rebound indicated for 2019 could quickly restore a bit of bullish sentiment.

At 500p, the share price is just about unchanged over the past three years, though with a few ups and downs along the way. That’s after 2015’s massive rise following on from the company’s recovery, and it highlights what I see as Character Group’s biggest weakness — its fortunes are governed by the toys and games market, which is greatly at the whim of each year’s fads and fashions.

Strong progress

A trading update last month was upbeat, with the company speaking of “strong demand for our core ranges and new introductions,” and expressing confidence in its prospects for the all-important Christmas season.

On Thursday the firm reported the acquisition of a 55% holding in Proxy, a Danish toy distributor, with the total payable being subject to future performance. The company says this should “potentially enable frictionless access to EU markets post-Brexit,” which is certainly an important consideration.

I see Character Group as tempting.

The post Should I go for the falling Persimmon share price, or this soaring dividend for my pension pot? appeared first on The Twelfth Magpie.

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Alan Oscroft has no position in any of the 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.

I would be happy to buy HSBC for its dividend income. But I wouldn’t expect big gains from a bank that’s already valued at £133bn and trades at a small premium to its book value.

Another concern is that although banks’ balance sheets appear to be much stronger than they were before the financial crisis, the market remains unconvinced. Banking stocks have headed steadily lower this year, despite rising profits. I think there’s a risk that total shareholder returns from this sector could lag the wider market for some time yet.

For this reason, I’m starting to focus my attention on finding opportunities among small-cap stocks, which may have the potential to deliver much bigger gains.

Profit from play

One stock I hope to add to my own portfolio in the next few weeks is toy manufacturer Character Group (LSE: CCT). This company specialises in producing toys based on television, film and game franchises such as Peppa Pig, Dr Who, Pokémon and Minecraft.

The business was hit by the failure of Toys R Us, but things now seen to be getting back on track. According to the firm, trading during the second half of the year to 31 August showed “a return to its previous growth pattern”. Management is confident that profits for the year will “comfortably reach market expectations”.

We can see what these are by checking broker consensus forecasts, which show adjusted earnings of 39p per share this year, with an expected dividend of 21p. These numbers put the stock on a forecast P/E of 12.9 with a prospective yield of 4.2%.

That looks like a good entry point to me for this company, which generated a stunning return on capital employed of 50% last year. I rate these shares as a buy.

A deep value bargain?

My final stock is Barbados-based luxury resort operator Elegant Hotels Group (LSE: EHG). Shares in this firm have fallen by about 25% so far this year. The decline seems to have been triggered by news of a 23% fall in adjusted pre-tax profit for 2017, followed by a dividend cut.

However, the shares are up by 5% at the time of writing following a positive trading update. The company says that bookings for next year are currently “ahead of the same period last year”.

Management also notes that recent tourist taxes implemented on flights and hotel stays in Barbados have not yet had a material impact on profits.

At the last-seen price of about 69p, Elegant shares offer a forecast dividend yield of 4.6% and trade at a discount of about 30% to their tangible net asset value of c.100p per share.

Analysts expect the group’s earnings to rise by 7% to 8.7p per share next year, putting the stock on a modest P/E of 7.5. It’s also worth noting that the company received an (unsuccessful) takeover approach in December 2017.

In my view, Elegant looks attractive as an income buy and a potential bid target. I’ve added the shares to my watch list for further research.

The post Forget the HSBC share price, these small-cap dividend stocks could be real bargains appeared first on The Twelfth Magpie.

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Roland Head 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.

Reaching the magic million milestone may feel like a distant dream to many. But buying stock in companies offering juicy dividends (and then re-investing them) is as good a way as any for getting there, albeit slowly.

Today, I’m taking a look at three less-well-known stocks, all of whom provide a great source of income to their owners at the current time.

Under the radar

Small-cap ceramic tableware, cookware, giftware and tabletop accessory provider Portmeirion Group (LSE: PMP) might not raise pulses, but it’s done no harm at all to the wealth of its owners. Those who purchased the stock just one year ago would now be sitting on a 26% capital gain. 

Having delivered a “strong first half trading performance” — during which revenue and pre-tax profit grew by 11.4% and 29.1%, respectively — it looks likely this positive momentum will continue.

But Portmeirion is also no slouch when it comes to returning cash to its owners. While the forecast 3.3% yield for 2019 isn’t the biggest, it’s worth highlighting that the business boasts a solid history of hiking its payouts. As seasoned Fools will know, a consistently rising dividend is usually preferable to a large but stagnant one.

At 16 times forecast earnings, Portmeirion isn’t cheap, but returns on capital are invariably high, its finances look sound, and the decision to diversify into new markets should mean it continues growing. One to capture on general market sell-offs, perhaps. 

Next up is fellow AIM-listed stock Character (LSE: CCT) — a designer and distributor of toys for a number of established brands including Peppa Pig and Teletubbies.

Earlier this month, the market minnow released a reassuring trading update in which it highlighted “a return to its previous growth pattern during the second half.” Having recovered quickly from the administration of Toys R Us (a big customer), sales in the UK are at record levels, allowing the company to state that it will “comfortably reach market expectations” for the full year. 

Like Portmeirion, Character also generates high returns on the capital it invests. Unlike Portmeirion, its stock is on sale for a more-than-palatable 10 times forecast earnings. For those who dislike firms loaded with debt, the £110m-cap boasts a net cash position. 

Character’s shares come with a fairly tasty forecast 4.5% yield at the current share price. With a habit of raising dividends by double-digit percentages, I suspect it will continue to be a reliable source of income going forward. 

A final stock that would likely pass many dividend hunters by is supply chain solutions provider Wincanton (LSE: WIN). 

Never one to shout from the rooftops, things have been fairly quiet on the news front since the company last reported on trading in late June. Back then, it was revealed that the £278m-cap continued to perform in line with expectations, with a new contract win with EDF Energy complementing a number of renewals.

While the business appears to be ticking along nicely, it’s the dividend stream I like most.

Wincanton is likely to return 10.5p per share this year — equating to an attractive 4.7% yield at its current share price. Having now resolved issues relating to its pension fund, there appears to be little preventing management from increasing payouts in the future.

The stock currently trades on an inviting price-to-earnings (P/E) ratio of 7 for the year ending 31 March. 

The post 3 unknown but great dividend stocks that could help you make a million 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 Portmeirion 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.

Looking ahead, the company could generate further sales and earnings growth over the long run. This could help it to outperform the FTSE 100, as well as many of its retail sector peers. As such, it could be worth buying alongside another growth share that reported positive results on Friday.

Improving outlook

The company in question is designer, developer and distributor of toys, games and giftware Character Group (LSE: CCT). The company released a trading update which showed that is has delivered a solid performance, and saw a return to growth in the second half of the year. Its UK business has delivered record sales, and this is set to mean that it comfortably meets expectations for the full year.

The company has seen strong demand from customers for its core ranges and new introductions. It is optimistic about its prospects for the autumn/winter trading period, including the key Christmas period.

Character Group is forecast to post a rise in earnings of 19% in the current year. This would be a strong result given the uncertainty which surrounds the UK economy, and especially the outlook for consumer confidence given the risks from Brexit. With the stock having a price-to-earnings growth (PEG) ratio of 0.6, it seems to offer a wide margin of safety. This could lead to high capital growth over the medium term, which may make it a worthwhile purchase at the present time.

Improving business

Morrisons also seems to be successfully navigating what continue to be uncertain prospects for the wider UK retail sector. As mentioned, its sales growth has been strong, and this trend could continue over the next few years. Its investment in the wholesale part of its business could make a significant impact on its overall financial performance. It continues to target £1bn in sales from its wholesale supply division, with it enabling the company to capitalise on the growth potential on offer within the convenience store sector.

Looking ahead, Morrisons is forecast to post a rise in earnings of 9% in each of the next two financial years. Given the challenging trading conditions it is facing, both from weak consumer confidence and strong competition in the supermarket sector, a high-single-digit earnings growth rate suggests that it has a resilient business model versus many of its peers that are struggling to post positive sales growth.

With the business focused on expanding its online presence and reducing debt levels ahead of potential interest rate rises, it seems to be in a strong position to perform well in the long run. As such, it could be a stock that is worth buying today, and holding for the long term.

The post Have £1,000 to invest? Morrisons is a FTSE 100 share that I’d buy and hold for the next 10 years appeared first on The Twelfth Magpie.

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• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
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• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
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Peter Stephens owns shares of Morrisons. 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.

The firm was hit particularly hard by the demise of Toys R Us, one of its largest customers. The bankruptcy forced Character to warn last year that results for the year ending August 2018 would be “significantly lower than market expectations” following the loss of income from the UK’s largest brick and mortar toy store.

Major setback 

The Toys R Us demise is already having a significant impact on Character. Today, the company published its financial figures for the half year ended February, showing a 36% decline in operating profit and similar contraction in pre-tax profit. Basic earnings per share for the period fell 38% year-on-year, and after including the impact of adjustments on foreign currency derivative positions, basic earnings per share declined 92% year-on-year. Group net cash was £14.3m, down from the £18.6m reported at the end of the same period last year, but up from the £11.5m reported at the end of August 2017.

However, despite Character’s dismal performance during the first half, management is upbeat on the outlook for the rest of the year as the Toy R Us fallout dissipates. 

“We continue to have great strength and depth across our brands and a wide range of long-term customers and suppliers,” the half-year update noted, continuing, “the directors remain optimistic that the business will see a return to its previous growth pattern during the second half of this financial year.“

Still, despite management’s optimism, I’m wary about Character’s outlook as the group has disappointed on growth several times in the past. With this being the case, even though the shares might look attractive today, trading at a forward P/E of 11 and supporting a dividend yield of 5.1%, I’m in no rush to buy the stock.

Slow and steady wins the race 

On the other hand, I’m more optimistic about the outlook for financial services business Chesnara (LSE: CSN). 

This is a holding company engaged in the management of life and pension books of businesses in the UK, a relatively stable and predictable industry. The enterprise buys life insurance funds closed to new customers and then manages them to maximise profit for investors. 

So far, Chesnara’s strategy has produced fantastic results. The dividend has grown at a steady rate of 3% per annum over the past five years and including the dividend, the shares have produced a total average annual return of around 16% per annum since 2012, smashing the FTSE 100 over the same period.

As the company continues to consolidate its position in the market, by buying up unwanted pension businesses, I believe that this performance is set to continue. 

With this being the case, compared to struggling Character, which will remain at the mercy of consumer trends, Chesnara, with its more stable and predictable business model (as well as the long-term income stream from pension management) looks to be the better investment. The shares currently support a dividend yield of 5.1%.

The post One 5% yielder I’d buy and one I’d sell after today’s news appeared first on The Twelfth Magpie.

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Rupert Hargreaves owns no share 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.

History suggests that investing in companies with a high return on capital employed (ROCE) can be a profitable strategy. These firms can usually fund their own growth and often provide attractive dividends. For this reason, I’ve been looking at two high ROCE stocks in the consumer sector.

High enough for now?

Online fashion retailer Boohoo.Com (LSE: BOO) needs little introduction. The Manchester-based group’s meteoric growth has caused the shares to triple over the last three years.

But while sales and profits are still rising fast, the group’s share price has been falling. Boohoo stock has now fallen by 42% from its 52-week high of 329p.

This decline isn’t due to poor financial performance. ROCE rose from 20% to 26% last year, as profits doubled following investment in new facilities. That’s well above my rule-of-thumb minimum ROCE of 15% for high quality businesses.

This could be the problem

I see this as a great business. But with a market cap of £2.1bn, it’s now quite large. Earnings per share are only expected to rise by about 30% this year, compared to a five-year average rate of well over 100% per year.

This has left the stock looking quite pricey. Based on analysts’ consensus forecasts for earnings of 2.8p per share this year, the stock has a forecast P/E of 65 for 2017/18, with a PEG ratio of 2.3 — a long way from value territory.

I suspect these shares may have further to fall before resuming their growth trajectory. If I owned this stock, I’d consider shifting some cash into one with stronger value credentials.

An overlooked gem?

One company I may add to my portfolio is toy maker Character Group (LSE: CCT). This £90m firm has been hit by the fallout from the collapse of Toys-R-Us, but today’s full-year results suggest to me that the damage will be limited.

Full-year revenue fell by 4.7% to £115.3m, but pre-tax profit excluding currency effects rose by 6.9% to £13.4m. Underlying earnings were up 12% to 50.5p per share, while the group’s net cash balance climbed 67% to £11.5m.

Management admits that weaker-than-expected orders from international customers will hit sales over Christmas. In order to limit the damage, inventories have been kept at a lower level than usual. The business is expected to return to growth during the second half of next year.

Despite these efforts, Character’s profitability has suffered. My calculations indicate that ROCE has fallen from 57.7% in 2016 to 46.2% in 2017. That’s disappointing, but I think it needs to be kept in context — 46% is still very high.

Why I might buy

To reward loyal shareholders, the full-year dividend for 2016/17 has been increased by 26.7% to 19p. At the current share price of around 420p, this gives a dividend yield of 4.5%. With the shares currently trading on a forecast P/E of 10 for 2017/18, I think this business could be too cheap to ignore.

I’ve added Character Group to my watch list for further research. Although 2018 could be a difficult year, I believe this remains an attractive business.

The post Why I’d buy this ‘secret’ turnaround stock over Boohoo.Com plc appeared first on The Twelfth Magpie.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended boohoo.com. 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.

But should recent falls in international toy distributor Character (LSE: CCT) and marketing group System 1 (LSE: SYS1) be regarded as a warning to stay away, or an opportunity to get involved? Here’s my take.

Devoid of character?

Having traded as high as 540p at the start of September, shares in Malden-based Character have since lost 30% of their value, driven partly the bankruptcy of Toys R Us in the US and Canada, but also by the company’s international customers becoming increasingly careful with their cash.

Last week’s trading update seems to have stabilised things for the time being. The company reiterated that is had witnessed a “solid finish” to the 2017 financial year with underlying pre-tax profit expected to meet market estimates. Moreover, sales in the UK remain comparable with those of last year and similar to trends witnessed in the toy industry in general.  

So long as investors are able to look beyond the short term, the outlook doesn’t look too bad either. While Character’s management already believes that the company will perform “significantly below” previous market estimates over the next year, a return to growth on the back of new product launches is expected in H2 2018, even if the full effect of this reversal won’t be seen in the numbers until the 2018/19 financial year.

Right now, you can pick up shares in the £82m cap on a bargain-basement valuation of just eight times predicted earnings. That looks a seriously good deal for a business boasting consistently high returns on capital, no debt, and a chunky, fully-covered 4.6% yield.

Big faller

Character’s investors will no doubt sympathise with the owners of  System 1, formerly known as Brainjuicer. Following a number of concerning updates, the latter’s shares have now halved in value since momentarily breaching the £10 mark in May. 

Perhaps unsurprisingly, last Monday’s six-month trading statement appears to have done little to attract investors back to the stock. Confirmation was given that H1 trading had been “slower than expected” after a significant reduction in spending by some of its clients. Indeed, pre-tax profit from the first half is now expected to be around £800,000 – over 70% less than that achieved over the same period in 2016. Factor in reports that the company’s market has become increasingly more competitive and it’s not surprising that System 1’s management remains “cautious” on the outlook for the rest of the financial year, citing a “usual lack of revenue visibility“.

With so much uncertainty around and the stock still trading at 17 times forecast earnings, it would appear many market participants are waiting for signs of improvement before making a move. Next week’s interim results will certainly make for interesting reading.

In the meantime, it’s worth remembering just how well System 1 has performed over the years. Like Character, it’s consistently generated high returns on the money it invests and boasts a net cash position. Free cashflow is excellent. And while its growth status means that System 1 offers little attraction to income hunters, its nine-year dividend growth streak isn’t to be sniffed at.

The company remains on my watchlist.

The post Time to get greedy with these battered small-cap stocks? 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 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.

Falling over 20% today is one small-cap stock after releasing a disappointing trading update. Could now be the right time to buy it for the long term?

Challenging conditions

Reporting on Wednesday was toy company Character Group (LSE: CCT). It announced that trading conditions in its markets remain challenging. Its international sales have been adversely affected by a number of factors. Some of the world’s largest toy companies have entered Chapter 11 bankruptcy protection in the US and Canada and this has had repercussions across global toy markets. In addition, many of the company’s international customers have taken a conservative approach to purchases.

As a result of its difficult trading conditions, the company’s performance for the full year is expected to be significantly below market expectations. However, the company anticipates that it will be a temporary downturn and it’s confident of an improved performance in the latter part of the year. It’s also set to introduce new products which it believes could help to offset some of the challenges it faces.

With the company continuing to be cash flow positive and maintaining its progressive dividend policy, today’s share price fall may be somewhat excessive. The fundamentals of the business remain sound and, should trading conditions improve, it’s likely to post impressive returns. For now, though, it may be prudent to wait for evidence of improved financial figures before buying.

Solid performance

While Character Group is facing a difficult outlook, WH Smith (LSE: SMWH) continues to deliver solid and sustainable growth. In the last four years it has been able to report a rise in earnings each year, while its performance over the medium term is set to be equally upbeat. It’s forecast to record a rise in its bottom line of 7% per annum over the next two years. And, while it has a relatively high price-to-earnings (P/E) ratio of 20, its growth potential remains impressive.

That’s especially the case in its Travel business with the company continuing to expand its store estate in international markets. This not only allows it to capitalise on strong growth rates outside of the UK, it also means the business is becoming more diversified.

Certainly, there are risks to the company in the form of a slowdown in consumer spending in the UK. However, with the company’s high street business set to benefit from cost-cutting and margin improvements in future, now could be the right time to buy the stock for the long run.

The post Is this small-cap stock a falling knife to catch after sliding 20% today? appeared first on The Twelfth Magpie.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended WH Smith. 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.

M&C Saatchi’s (LSE: SAA) half-year report points out that “headline results” is not a defined term under International Financial Reporting Standards, meaning the finance department can decide what costs to exclude without restriction. 

There is a vast gulf between the statutory and headline figures reported today and I believe this could be a hindrance, not a helping hand, for investors trying to understand the business. Have a look at the impact of adjustments:

• Headline profit before tax increased 17%
• Statutory profit before tax decreased 10%

A few perfectly legal omissions have been applied to supposedly present a more accurate picture of business performance, including share-based payment expenses. In the first half of this year, these totalled £6.85m. That’s a significant cost and I’d be ok with the exclusion it if it truly was a one-off, but it seems to be a regularly incurred cost.

Last year, for example, the company excluded nearly £8m in share-based payment charges from headline profits. This helped it present headline profit before tax as up 18%, compared to actual profit before tax which dropped roughly 46%.  

That said, the company is making advancements. Revenue grew 21%, or 12% at constant currency, and this is reflected in the 15% increase in the interim dividend. However, I’ll be avoiding M&C Saatchi because I just can’t get comfortable with the accounting practices or the balance sheet, which is dominated by intangible assets. 

The power of borrowed brands

A stock I’m far more interested in is Character Group (LSE: CCT). At last count, this £97m market cap toymaker had net cash of £18.6m and traded on a P/E of just under 10.

Character cashes in on the power of brands like Disney, Bob the Builder, Peppa Pig and — most recently — Pokémon, through licensing agreements. It then designs quality toys based on these IPs and outsources manufacturing.

This approach has turned it into a capital-light cash cow. The management team takes care of shareholders via buybacks and dividends too. The shares yield a solid 3% and the share count has reduced from 52.8m in August 2005 to 20.9m today. Buybacks on that scale can be a huge driver of shareholder returns. The company is still buying today, a great decision given the current low valuation. 

One of the company’s largest clients, Toys R US, was recently granted bankruptcy protection in the US, although Character Group has admitted it is still unsure how this will impact its business going forward. I’m not too worried about this short-term blip and believe any downside is more than priced-into the aforementioned dirt-cheap valuation.

Shares in the company are up 280% over the last five years and that return doesn’t include dividends.

The post 1 value stock I’d buy and 1 I’d sell appeared first on The Twelfth Magpie.

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Zach Coffell has no position in any of the 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.