I believe one of these stocks currently offers excellent value and I rate it a ‘buy’. I see the other as having hidden risks that lead me to give it a place on my ‘sell’ list.

Re-rating potential

Formerly a growth stock for a good number of years, Goodwin’s annual earnings advances ground to a halt — nay, went into reverse — in the wake of the oil and metals prices crash. The company said in its recent half-year results that while oil has recovered to over $60 a barrel and iron ore to over $60 a tonne, “there is little reason to expect an upturn in the release of orders for new capacity in these capital equipment-needy markets until 2020.”

However, Goodwin hasn’t been idle in winning business in new markets, such as nuclear recycling and decommissioning, while its refractory engineering business is also growing. Established in the nineteenth century and still run by descendents of the founders, the company is prudently managed to be resilient through cyclical downturns. It’s remained profitable and maintained its dividend during the recent challenging period. Net debt remains relatively conservative at £27m, particularly as we’re at the bottom of a cyclical trough.

A trailing 12-month earnings multiple of 23 may not appear particularly good value but investors are beginning to recognise that the company is returning to growth. A measure of the potential re-rating over the next few years is that the current share price represents less than eight times previous peak earnings. For these reasons, I rate the stock a ‘buy’.

Downside risk

On the face of it, Motorpoint’s trailing 12-month earnings multiple of 13.8 appears reasonable value and its balance sheet solid, with £21.4m cash and no debt. However, I have several concerns that persuade me to rate the stock a ‘sell’.

Car sales have boomed in the easy credit environment since the financial crisis. The numbers and proportion sold via financing deals have risen mind-bogglingly. And of course, companies involved in flogging cars have seen terrific increases in their profits.

From time to time you get a spate of stock market flotations in a particularly ‘hot’ sector that often turn out to be at or near a cyclical high. Motorpoint’s flotation last year followed those of Auto Trader and BCA Marketplace (owner of WeBuyAnyCar) the year before. However, this year, new car sales have fallen off a cliff and sales of second-hand vehicles dipped for a second successive quarter in July-September.

As well as being exposed to the general state of the economy, Motorpoint relies on various finance facilities to fund its operations, including stock financing secured against its retail vehicle stocks. It concedes that a change in pricing, facility limits etc “could significantly constrain the Group’s ability to trade or the Group could be required to dispose of assets at below their market value or at a substantial discount.”

The company had £90m of inventory at its latest balance sheet date, as well as other assets that could be adversely impacted by falling sales and prices. I see risk of a significant downturn, which isn’t discounted in the current share price.

The post One FTSE SmallCap Index growth stock I’d buy, and one I’d sell appeared first on The Twelfth Magpie.

More reading

• Back below 500p, is it time to consider BP shares again?
• Is there any value left in Lloyds shares now they’re over £1?
• How much would I need in a Stocks and Shares ISA to target £19,036 a year in second income?
• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?
• This 7.5% yielding passive income share is at a 13-year low! Time to consider buying?

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Goodwin. 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 going for Tullow Oil (LSE: TLW) would be a step too far for me, with net debt standing at $3.8bn (which is more than the company’s market cap). And that’s even after a rights issued in April this year raised £600m and contributed to a $1bn debt reduction — at least that’s something Premier Oil hasn’t had to do as it’s managed to keep its creditors reasonably sweet.

What Tullow desperately needs is an oil price rise or some significant new discovery, and it doesn’t look like getting either of those any time soon.

On the latter, Friday’s Araku-1 exploration well update was disappointing, as after reaching a depth of 2,685 metres and penetrating the objectives of the Araku prospect, “no significant reservoir quality rocks were encountered” and the well is to be plugged and abandoned.

What next?

The drilling has apparently led to new geological insights which should de-risk some deeper plays, but the market is not too pleased with the overall outcome, and has lopped 5% off the share price to 173p.

As for the price of a barrel of oil, that’s been stubbornly stuck around the $50 level for the last three years, currently creeping just above that to $52.50.

Many observers, including me, were expecting to see prices clawing back at least towards the $75 level by now, but with OPEC reductions not having any great effect and the extensive oil shale industry adding to supplies, that’s looking increasingly unlikely.

 Family business

As a result of the slump in demand from oil and gas producers, business at Goodwin (LSE: GDWN) has been suffering. The firm makes valves, pumps, and other engineering things, which are used heavily in the oil and gas business and also in mining, and the last three years have seen earnings per share fall from 207p to 84.5p — though the modest dividend has been retained at a little over 42p.

Since a peak in spring 2014, the shares have lost more than 50% of their value to today’s 1,960p, but we really need to examine the wider picture. At the peak I reckon we were looking at a slightly over-enthusiastic growth valuation after a couple of years of stunning EPS rises.

The longer-term price movement is nothing short of spectacular, with Goodwin shares having multiplied 39-fold since 1988 — I don’t know many investments that can turn £1,000 into £39,000 in a bit under 30 years, with dividends added as an extra.

Recovering

And the shares are already picking up, having put on 23% in the past month, so the recovery could well be on the cards.

Goodwin’s business is not short term, tying in with cycles of capital expenditure in big industrial markets, and the company has the management it needs to recognise and deal with that. The founding family still has a major stake in the firm, and that should keep it largely immune from pressures to look good over any short-term periods.

I see Goodwin as a seriously good long-term investment, and one which could actually do very well over the next couple of years too.

The post One small-cap turnaround stock I’d buy instead of Tullow Oil plc appeared first on The Twelfth Magpie.

More reading

• Back below 500p, is it time to consider BP shares again?
• Is there any value left in Lloyds shares now they’re over £1?
• How much would I need in a Stocks and Shares ISA to target £19,036 a year in second income?
• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?
• This 7.5% yielding passive income share is at a 13-year low! Time to consider buying?

Alan Oscroft owns shares in Premier Oil. The Motley Fool UK has recommended Goodwin. 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.

This FTSE SmallCap-listed £109m company isn’t a needle-in-a-haystack breakthrough biotech or disruptive digital star. It’s a thoroughly unglamorous mechanical and refractory engineering company that’s been around since 1883.

Long-term mindset

I’ve put Goodwin into a long-term context for you, because on a short-term view, with the shares having been above 4,000p just a few years ago, you might be inclined to think that the company is a distinctly unpromising prospect to make you brilliantly rich.

Having made the point that, despite the recent slump in the shares, Goodwin has delivered a tremendous return for long-term investors, let me also explain why I’m confident it will go on delivering long-term returns.

The company does significant business with the oil, gas and mining industries where capital expenditure has massively reduced over the past few years. Despite the inevitable pressure on Goodwin’s top line and gross margin, the business has remained profitable. And, in contrast to many other companies involved in, or exposed to oil, gas and mining, its balance sheet has also remained healthy. Debt has increased but net gearing is still a very conservative 31.4%.

I put its resilience down to the long-term mindset of the successive generations of the family who’ve carefully stewarded the business to negotiate the bad times as well as thrive in the good. This is the sort of company I’d happily build up a holding in by regularly investing through rain and shine. Times of rain — as now — I’d view as an ideal starting point.

Another in the same mold

AIM-listed timber firm James Latham (LSE: LTHM) has the same attractive qualities as Goodwin. It was founded in 1757, continues to be stewarded by descendents of the founding family and has delivered excellent long-term returns for shareholders.

Adjusting for a four-for-one share split in 2005, EPS has increased from 7.425p in 1999 to 56p in its latest financial year. The dividend has advanced from 2.75p to 15.35p over the same period. And the share price has climbed from 238.5p at the turn of this century to 897.5p today, valuing the business at £176m.

At its AGM today, Latham said April-to-July revenue was 6% ahead of the same period last year and that customer activity remains positive but the trading environment competitive. The company has invested in new sites for growth and efficiency but said cash reserves remain strong (there was net cash of £16.3m on the balance sheet at the 31 March year end).

One way Latham currently differs from Goodwin is that its share price isn’t depressed. In fact, its shares have made new all-time highs this year. Nevertheless, I continue to see this as a business that could deliver great rewards for long-term investors.

The post 2 small-cap stars that could make you brilliantly rich appeared first on The Twelfth Magpie.

More reading

• Back below 500p, is it time to consider BP shares again?
• Is there any value left in Lloyds shares now they’re over £1?
• How much would I need in a Stocks and Shares ISA to target £19,036 a year in second income?
• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?
• This 7.5% yielding passive income share is at a 13-year low! Time to consider buying?

The Motley Fool UK has recommended Goodwin. 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

Arbitrage at its best 

The first one on my list is Mountview Estates (LSE: MTVW). Its founder no longer runs this £400m market cap company but this is entirely forgivable as it was established all the way back in 1937. Furthermore, the company is now run by the co-founder’s son and he and the wider family own around half of all outstanding shares, giving them plenty of skin in the game.

Befitting a family-run company with a long history, its business model is buying at a steep discount buildings with flats that have regulated rents below market value and then waiting, sometimes decades, for these flats to become unoccupied and selling them on at market value.

While no new regulated tenancy properties have been created since 1988, the company still has a very large and constantly evolving portfolio of just under 4,000 properties as of the end of fiscal year 2016. Since around half of all its properties are in London and another 33% in the Home Counties, it has benefited from rising property values there.

In each of the past four years rising sale prices have led to double-digit increases in earnings and allowed dividends per share to nearly double to 300p in 2016. This is still a very conservative one-third of earnings, but shareholders still enjoyed a respectable 2.7% annual yield.

Management’s conservative approach to shareholder returns also carries over to its policy towards debt as the gearing ratio was a very low 11.8% at year-end. This healthy balance sheet means the business is in a good position to benefit from any downturn in the property market as it will have the financial firepower to make deals at an even deeper than normal discount.

Shares of Mountview are pricey for a property firm at 12 times trailing earnings but with a very long history of rewarding shareholders since going public in 1960 I reckon this business is one to hold for the long term.

A truly long term outlook

Another family-run business with a long history of keeping shareholders happy is iron foundry Goodwin (LSE: GDWN). Despite being set up in 1883, it is still run by a Goodwin and the family retains a large stake.

It has been in a holding pattern in the past few years as the downturn in oil, gas and commodities prices has significantly dampened demand for the company’s valves, pumps and other industrial products. However, management has been through many, many downturns before and was prepared for this one.

It has invested in recent years in expanding its capabilities into creating products for the aerospace, jewellery and automotive industries that are paying off and keeping it highly profitable even during the downturn in energy markets. In the nine months to January the diversification helped increase sales from £87m to £105m year-on-year, although pre-tax profits fell from £9m to £8.2m.

With a long history of adapting to ever-changing market demands and a proven ability to withstand very deep market downturns Goodwin is one share I’ll be looking at more closely once energy markets rebound.

The post 2 family-owned businesses to retire on appeared first on The Twelfth Magpie.

More reading

• Back below 500p, is it time to consider BP shares again?
• Is there any value left in Lloyds shares now they’re over £1?
• How much would I need in a Stocks and Shares ISA to target £19,036 a year in second income?
• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?
• This 7.5% yielding passive income share is at a 13-year low! Time to consider buying?

Ian Pierce has no position in any shares mentioned. The Motley Fool UK owns shares of Mountview Estates. The Motley Fool UK has recommended Goodwin. 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.

However, from their current depressed valuations, these three stocks have the potential to re-rate considerably higher when market sentiment improves. Their shares could soar.

Barclays

Barclays’ progress since the financial crisis has been disappointingly slow. Recovery has not been helped by wrongdoing and scandal. Of all the banks, Barclays seems to have been most successful in turning “shooting yourself in the foot” into an art. Restructuring has dragged interminably, and staff morale is reportedly low.

Investor sentiment is low, too. For example, while investors are currently prepared to pay £1.52 for every £1 of Lloyds‘ assets, they’re only willing to pay 97p for every £1 of Barclays’ assets. Of course, Lloyds is presently making more profit from its assets than Barclays, but the relative valuations indicate the size of the potential re-rating, if Barclays can really get its act together.

Even as things stand, Barclays is rated on a current-year forecast price-to-earnings (P/E) ratio of a modest 12, falling to just 10 for 2016. Furthermore, P/E-to-earnings growth (PEG) readouts of a mere 0.4 and 0.5 for the two years are well on the value side of the PEG “fair value” marker of 1. The recent arrival of John “Mack the Knife” McFarlane as Barclays’ executive chairman could speed up a re-rating of the shares, which are currently trading at under 280p.

Ocean Wilsons

Ocean Wilsons’ current difficulties are not of its own making. The group’s investment division holds a diversified portfolio of international investments, and continues to perform perfectly satisfactorily, but the group’s major asset is a subsidiary called Wilson Sons, which controls a maritime services and logistics company in Brazil.

Some of the Brazilian businesses are performing robustly but, with operations that include container terminals and offshore oil support services, the company is facing headwinds from softer export demand, the low oil price and reduced industrial activity — as well as an adverse impact from the strength of the US dollar against the Brazilian Real.

Ocean Wilsons’ shares were at an all-time high of over £14 a few years ago, and were above £12 as recently as last year. They’re presently changing hands for less than £9. On a current-year forecast P/E of 13.5, falling to 10.5 next year — and PEG ratings of 0.2 and 0.4, respectively — there’s scope for a substantial re-rating of this well-run company’s shares.

Goodwin

Small-cap engineer Goodwin is another company that has been impacted by the collapse of the oil price. In its annual results, released last weak, the directors reported a substantial contraction in order placing activity in the oil and gas engineering market sector. Weakness in Goodwin’s mechanical engineering division was partially offset by strong growth in its smaller refractory engineering division; but, nevertheless, group revenue was down 3% and pre-tax profit down 17% year on year.

Goodwin’s shares reached a high of over £41 last year, but are currently trading at under £25. This is another well-run business, and its directors’ commentaries should win an award for succinctness and plain English. The numbers, too, are presented with admirable transparency: warts and all; no adjusted this and adjusted that.

No City analysts are covering Goodwin, and the company doesn’t seem to bother with the paid-for “research” notes that many small companies seem to think are a good use of shareholders’ funds. The trailing P/E is a modest 12, and the previous year’s earnings, which give a P/E of just 9.5, demonstrate the potential for a re-rating of the shares when earnings growth returns in due course.

The post 3 Unloved Stocks Set To Soar: Barclays PLC, Ocean Wilsons Holdings Limited & Goodwin plc appeared first on The Twelfth Magpie.

More reading

• Up 50% in a year! That’s not the only reason I’d consider buying Barclays over Nvidia stock today
• Barclays shares could soon soar another 21%, according to the latest price target
• After a 160% rally, major brokers still see more gains for Barclays shares. Here’s why
• How many Barclays shares do I need to buy to get a £1,000 passive income?
• Here’s the very latest Barclays share price target upgrade

G A Chester has no position in any shares mentioned. The Motley Fool UK has recommended Barclays. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.