As I speculated in March last year, car dealer Lookers (LSE: LOOK) was to enjoy a brilliant 2021. Throw in 2022’s gains so far and it’s now in serious danger of losing its penny stock status. Not that I expect holders will complain. 

Penny stock power

Since February 2021, shares in the small-cap have soared over 150%! Contrast this with the 17% and 8% uplift in the FTSE 100 and FTSE 250 respectively and I have more evidence of how minnows have the potential to turbocharge my wealth. This is assuming, of course, I select them carefully. A healthy bit of luck goes a long way too. 

Still, the reasons for Lookers incredible returns aren’t hard to fathom. A shortage of semiconductors and a consequent slowdown in manufacturing has accelerated the price of new and second-hand vehicles. This, when combined with the growth in savings as a result of multiple UK lockdowns, was always likely to benefit the £380m-cap company.

With Covid-19 travel restrictions throwing holiday plans into disarray, the rush to buy a new (or nearly new) set of wheels was inevitable in hindsight.

Can this continue?

January’s trading update certainly made for pleasant reading. Trading “remained strong” and “above the Board’s expectations” in the final quarter, thanks to “excellent new and used vehicle margins“. Like-for-like after-sales revenues were also up 7.1% compared to the previous year. 

The share price also received another huge boost at the end of last month after Constellation Automotive Holdings snapped up almost 20% of the company. According to chairman Ian Bull, the new investor regards the company as “significantly undervalued“. Then again, you wouldn’t expect them to say anything different. No less than 102p was paid for each share!

Time will tell if this proves to be a good bit of business. Lookers certainly appears cheap at face value. Even with the near-39% drop in earnings per share expected in 2022, the stock still changes hands at a P/E of just nine. A forecast dividend yield of 3.3% is also in the offing to prospective owners.

Based on these attractions, I’m cautiously optimistic this penny stock can continue rising. That said, I don’t doubt they’ll be some profit-taking soon. I also need to remember that margins are wafer-thin and demand will surely moderate as supply chains get back to normal.  

Bouncing back in 2022?

Since I highlighted its potential at the same time as Lookers, it’s worth mentioning that I remain optimistic about freight manager Xpediator (LSE: XPD). That’s despite the company’s share price coming back down to earth after motoring during the first half of 2021.

January’s trading update on FY21 didn’t contain any nasties as far as I could see. Revenue “in excess of £300m” is now expected. That’s growth of at least 36%. Adjusted pre-tax profit will also be “well in excess of £8.5m” compared to the £7.2m achieved in 2020. 

Looking ahead, a new 200,000 sq ft facility in Southampton is predicted to bring efficiency and capacity benefits this year. Increased business in Europe is also likely as Covid-19 restrictions are lifted.

For balance, it’s worth mentioning that this penny stock’s margins are as thin as those of Lookers. The current P/E of 13 is also fairly high, relative to the industry average, although the shares do come with a well-covered 3.1% dividend yield.

The post I was right about this penny stock! Here’s another one I’d buy appeared first on The Twelfth Magpie.

More reading

• Forget meal deals! Here’s how £8 a day could be worth £357,000
• With a 7% yield, is this dividend share a no-brainer?
• The CMC Markets share price is smashing the FTSE 100 in 2026. Is there an opportunity here?
• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?

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.

Xpediator

First up is freight management and warehouse service provider Xpediator (LSE: XPD). The company operates across the UK and Central and Eastern Europe.

As maybe expected, the pandemic hasn’t made life easy for the business. However, since dropping to 14p last March, shares have rallied almost 250%! A quick look at its most recent update on trading shows why. 

Back in January, the small-cap reported that profits in 2020 would likely be “significantly ahead of market expectations” following “higher than anticipated demand” for the company’s diversified services at the tail end of the year. Xpediator now looks set to report adjusted pre-tax profit of £7.2m in April. That’s up 40% on what it achieved in 2019.  

Naturally, the AIM-listed company won’t be everyone’s cup of tea. Operating margins tend to be very low in this line of work. Others may be put off by the company’s steadily increasing level of debt.

Even so, I think this momentum could continue in 2021. A forecast price-to-earnings (P/E) of 10 certainly doesn’t look too dear yet.  

Lookers

Another penny stock that could prove a great buy in time is car retailer Lookers (LSE: LOOK). This is assuming consumer spending recovers strongly once lockdown restrictions are lifted.

Following a decent recovery in H2, Lookers looks set to report underlying pre-tax profit of £10m for 2020. This compares favourably to the £4.2m achieved in 2019. It’s also better than the “small loss” penciled in by analysts. What’s more, LOOK’s management also expects to reveal a reduction in net debt from £59.5m in 2019 to £45m by the end of last year.

At 52p a pop, shares in Lookers are already up 150% since last July. Notwithstanding this, they’re still far below the 157p they were trading at five years ago.

As things stand, a price-to-earnings (P/E) ratio of 11 looks reasonable value to me. Then again, it’s worth noting that the arrival of the third wave of the coronavirus in the UK could mean analyst projections are quickly thrown out of the window.

Arc Minerals

A final penny stock — and one I own — is copper explorer Arc Minerals (LSE: ARCM). Thanks to the buzz around electric vehicles, mining stocks have garnered a lot more attention recently. ARCM’s share price is up almost 350% in the last 12 months! That said, I think the £66m-cap is still flying under most investors’ radars.

Focused on copper deposits in the western part of the Zambian Copperbelt, Arc has stakes in two subsidiaries, Zamzort and Zaco. The reason it’s come to my attention in recent months is the possibility of a deal with mining giant Anglo American.

Is this nailed on? Definitely not. Moreover, a recent placing by the company — and subsequent reduction in its share price — only serves to highlight how tricky investing in this sector can be, and why no one should invest more than they’re prepared to lose.

So, Arc Minerals is undoubtedly a high-risk play. However, I expect fireworks later in the year if (and that’s a big ‘if’) all goes to plan. 

The post 3 penny stocks to buy now appeared first on The Twelfth Magpie.

More reading

• Forget meal deals! Here’s how £8 a day could be worth £357,000
• With a 7% yield, is this dividend share a no-brainer?
• The CMC Markets share price is smashing the FTSE 100 in 2026. Is there an opportunity here?
• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?

Paul Summers owns shares in Arc Minerals. 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 spoke recently about the prolonged decline in new car sales in the UK, an issue caused by increased uncertainty from consumers and businesses alike in light of the unresolved Brexit problem. But as recent data from the Society of Motor Traders and Manufacturers (SMMT) shows, this political fog isn’t the only headwind Lookers et al are being swept over by.

News of a 4.9% decline in total new vehicle sales in June was bad enough, worsening from the 4.6% annual drop recorded a month earlier. What the auto body said caused it “grave concern” though, was the sharp demand drop last month for low emission cars such as hybrids and hydrogen-powered units. Sales of these vehicles dropped for the first time in 26 months on what the SMMT described as a combination of “confusing policies and the premature removal of purchase incentives.”

Looking good? No way

It would take a braver man than me to plough into Lookers right now, even though at current prices it trades on a rock-bottom forward P/E ratio of 5.1 times and carries a monster 9.1% dividend yield.

The extent of the company’s problems were highlighted on Friday when it hacked its profits estimates for the half year down to £32m (versus profits of £43m a year earlier). And I reckon this is unlikely to be the last time Lookers reduces its forecasts given the scale of market deterioration.

A 4.6% decline in new vehicle sales during quarter two is bad enough, deteriorating from 2.4% in the prior three months. “Weaker demand and the resulting margin pressure” at its used-car division in the last quarter really compounds the retailer’s woes.

With the political and economic uncertainty that’s smacking car demand promising to persist long into the future, and Lookers also facing an FCA probe into its sales processes, there’s plenty of scope for the company’s share price to keep on sinking. I reckon it’s a stock that should be avoided at all costs.

A better buy

Those looking for solid dip buys would be better off examining Georgia Healthcare Group (LSE: GHG) instead, I believe. The business, which provides a range of healthcare services (like hospital care and drugs dispensing) in the fast-growing Eurasian nation, is experiencing some stupendous revenues growth right now.

According to its most recent quarterlies, sales expanded 13% in the period to April. I’m expecting the top line to keep impressing as Georgian economic growth balloons, and the group works (and spends) heavily to expand the quality and range of its operations. On Friday, for instance, it announced it would lease space to maternity care specialist the David Davarashvili Clinic at its Iashvili Hospital in Tbilisi, a significant boost to neonatal and paediatric services at the site.

Georgia Healthcare’s share price has fallen 12% over the past month, meaning it trades on a bargain-basement forward PEG ratio of 0.5 times. Given that City analysts expect the medical mammoth to keep delivering stunning double-digit annual earnings growth, I reckon it’s a great buy today.

The post This unloved share’s fallen 50%+ in three months. Is it NOW time to buy? appeared first on The Twelfth Magpie.

More reading

• Forget meal deals! Here’s how £8 a day could be worth £357,000
• With a 7% yield, is this dividend share a no-brainer?
• The CMC Markets share price is smashing the FTSE 100 in 2026. Is there an opportunity here?
• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?

Royston Wild 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.

It’s no shock to this Fool at least, though I take no pleasure in saying this. I was tipping the UK’s car retailers as rock-solid sells more than a year ago amid painful slumps in new vehicle demand. The 52% collapse in Lookers’s stock price in that time should come as a warning to any of those dip-buyers emerging more recently who are intent to nip in and grab a bargain.

Sure, the small cap might boast a mind-bendingly low forward P/E ratio of 3.7 times, a reading that’s well inside the accepted bargain terrain of 10 times and below. It might carry a jumbo corresponding dividend yield of 8.1%, too. But I for one won’t be touching it with a bargepole.

Stuck in reverse

It’s not just that new car registrations in the UK continue to implode, either, a trend which is showing signs of accelerating if anything. The latest report from the Society of Motor Traders and Manufacturers (SMMT) showed vehicle sales slump 4.6% in May, dragging the average for the year to date down to reveal a 3.1% fall.

Lookers generates 32% of gross profits from new unit sales, so these worsening statistics should come as huge concern. This, however, is just one half of the problem facing the retail giant as demand for used cars — a segment that creates exactly a quarter of profits for the group — has also remained under pressure of late.

The SMMT’s latest report on pre-owned sales showed a 0.6% drop in the first three months of 2019, following on from the 0.7% decline punched in the final quarter of last year.

The bad news keeps on coming

It moves me not an inch that Lookers put in a solid-enough trading update in late May, in which it declared a 3% sales improvement for its new car division for the three months to March, and an even-better 8% for its pre-owned units, too.

Its core aftersales divisions, responsible for around 40% of gross profits, may be stealing the show too and giving shareholders something to cheer about (sales here rose 11% in the last quarter). To my mind, however,this provides little reason to be optimistic, though, as the bulk of its other operations face a frankly terrifying outlook, one which is in danger of worsening as the threat of an economically damaging ‘no deal’ Brexit grows.

And as if things weren’t bad enough, Lookers also shook the market last week by announcing that the Financial Conduct Authority was investigating its sales processes for the period spanning January 1 2016 to the middle of this month. The retailer said that it “cannot estimate what effect, if any, the outcome of this investigation may have,” as one would expect, meaning that investors should also be wary of a whopping great fine coming its way.

All in all there’s plenty to be fearful about for Lookers, and very few reasons to expect its share price to spring higher again. It’s a share only for the extremely brave or the foolhardy, in my opinion, and I for one will continue to avoid it like the plague. 

The post Watch out! I think this 8% yielder could end up costing you a fortune appeared first on The Twelfth Magpie.

More reading

• Forget meal deals! Here’s how £8 a day could be worth £357,000
• With a 7% yield, is this dividend share a no-brainer?
• The CMC Markets share price is smashing the FTSE 100 in 2026. Is there an opportunity here?
• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?

Royston Wild 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.

Today I’m going to outline two stocks that I believe are deeply undervalued and have the potential to double investors’ money over the medium term.

Dramatic recovery

Pendragon (LSE: PDG) is one of the largest car retailers in the UK. Unfortunately, this industry is currently suffering from falling demand as consumers have been putting off big-ticket purchases due to Brexit uncertainty. 

This change in sentiment has put the brake on Pendragon’s earnings growth. Underlying profit before tax fell £12.6m to £47.8m last year as total revenue ticked lower by 2.4% (a 24.3% jump in costs didn’t help matters). The good news is, for 2018, underlying earnings per share came in slightly higher than expectations at 2.8p, compared to the City’s projection of 2.6p. Analysts are expecting a slight increase next year as some one-off costs are not repeated, and on this basis, the stock is trading at a forward P/E of just 9.

Even though the company is facing some headwinds today, I do not think it is unreasonable to say that, over the medium term, earnings will recover as consumer spending returns. 

Indeed, according to figures published last year, the average age of cars on Britan’s roads is now at its highest level since the turn of the millennium. Drivers cannot put off purchasing a new vehicle forever, and when confidence returns, I expect Pendragon’s earnings to jump, possibly back to the high of 5p printed in 2015. 

If the company can achieve this target in the near term, the stock could be worth as much as 50p assuming a multiple of 10 times earnings, that’s an increase of 100% from the current level. On top of this, the shares also offer a 5.3% dividend yield.

Driving ahead

Lookers (LSE: LOOK) is another company that I think could see a dramatic recovery in earnings over the next few years. 

Like Pendragon, the car retailer is currently seeing a drop-off in demand for new vehicles as consumers put off purchases. Adjusted pre-tax profit declined 1.6% in 2018 as turnover rose 3.9%. Looking at these figures, I am optimistic that if the company can grow sales in such a hostile environment, when growth returns in the new car market, earnings could surge.

Right now, shares in the company are dealing at just 7.5 times forward earnings which, in my opinion, looks cheap even though profits are falling. For some comparison, the rest of the UK market is trading at an average forward P/E of 12.2.

Historically, Lookers’ operating profit margin has been around 56% higher than it is today, which implies that when growth returns and the group’s economies of scale start to pay off, earnings per share could potentially rise to 20p per share or more, according to my calculations (based on the City’s 2019 earnings target of 13.6p). This implies a possible capital gain of more than 100% from current levels. On top of this potential, there’s also a dividend yield of 3.2% on offer for investors.

The post Have £2k to invest? I think these stocks could double your money appeared first on The Twelfth Magpie.

More reading

• Forget meal deals! Here’s how £8 a day could be worth £357,000
• With a 7% yield, is this dividend share a no-brainer?
• The CMC Markets share price is smashing the FTSE 100 in 2026. Is there an opportunity here?
• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?

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

This is just a tip of the iceberg as the implications of Brexit force the auto industry to convulse. The political and economic uncertainty, and the prospect of severe supply disruption, created by the UK’s planned withdrawal from the European Union in the short term and long beyond is clearly too much for many car manufacturers to bear.

Brexit has already played havoc with the industry over the past year as individuals and businesses have both held off on making big-ticket car purchases, resulting in plummeting unit sales across the country. But this is not the only problem shaking car demand right now; the reduction of government incentives for electric vehicles has hit sales of these models hard, while a lack of clarity over the future of the diesel engine are also hampering overall car sales.

Watch out!

So things are looking pretty grim for those involved in car industry right now. Accordingly I’m expecting another less-than-reassuring trading update from Lookers (LSE: LOOK) when full-year results are unsheathed on March 13.

Last time out, the car retailer advised that new auto sales had tipped 7% lower in the nine months to September, and while the supply-side issues of earlier in the period have eased, I’m not expecting demand to have torn higher since. I’m also fearing what latest numbers on demand for the company’s used units will show — turnover here rose 10% between January and September — given the run of bad data in recent months on the health of the pre-owned segment.

For these reasons I’m not tempted to buy Lookers despite its low valuation, a forward P/E ratio of 7.1 times, nor its inflation-beating 4.1% corresponding dividend yield. Indeed, given the share price charge that the retailer has enjoyed since the turn of 2019, I fear that a sharp investor exodus could be on the cards next week.

One I’d buy

I’d be much, much happier to splash the cash on Prudential (LSE: PRU) before full-year results of its own are also released on Wednesday.

I’ve long lauded the FTSE 100 firm because of the pace at which business in the promised lands of Asia is exploding. Last time it updated the market in August it reported an 11% rise in new business profit in these exciting growth regions during January to June, with eight countries within this region printing solid double-digit-percentage rises.

Economic conditions in Asia might have been a bit bumpier more recently, but given the chronic disparity between the range of financial products on offer here and the demands of an increasingly-wealthy and populous continent, I’m expecting Prudential to have continued impressing in the second half.

Right now the business trades on a dirt-cheap forward P/E ratio of 9.2 times and carries a market-beating 3.6% corresponding dividend yield. This provides plenty of scope for Prudential’s share price to ignite next week, in my opinion, and this makes it a white-hot buy in my book.

The post A FTSE 100 dividend stock I’d buy (and a share I’d desperately avoid) before next week’s updates appeared first on The Twelfth Magpie.

More reading

• Thinking about a SIPP for retirement? Here are 3 starter stocks to consider
• How much do you need in a Stocks and Shares ISA to generate £100 a day in passive income?
• FTSE 100 value stocks: where has the market become too pessimistic?
• 4 steps to building a £38,456 retirement income with ISA shares

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Prudential. 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.

Why so? Well it’s not in response to soaring customer numbers in recent times, sales at the travel operator suffering over the summer because of the extraordinarily hot weather in Europe that prompted citizens to vacation at home.

Instead, the market has been impressed by On The Beach’s online-only model which allows it to dynamically reduce costs in times of declining revenues. This meant that pre-tax profit in the 12 months to September 2018 still surged 24% year-on-year to £26.1m. And with slowing economic growth in the UK and continental Europe threatening to impact holiday bookings over the medium term, this quality is worth its weight in gold.

A sunny selection

Discarding those near-term revenues worries, On The Beach is a share in prime position to lasso the growing number of travellers booking their holidays online as a consequence of the e-commerce phenomenon. It also boasts the flexibility to allow it to react to changing consumer trends more effectively than its traditional high street rivals, and all this is likely to underpin scintillating earnings growth looking ahead.

My view is shared by City analysts who anticipate that earnings will continue to improve by double-digit percentages over the next two years at least. And this leads to predictions that dividends will keep shooting skywards as well, the 3.3p per share reward of fiscal 2018 anticipated to rise to 3.9p this year and 4.7p in the next period.

Subsequent yields of 0.9% and 1.1% for this year and next, respectively, clearly aren’t the biggest on the market. Still, for long-term investors I reckon the rate at which On The Beach is raising dividends, and is likely to continue to do so, makes it a white-hot income share to buy today.

Another recent riser

Lookers (LSE: LOOK) is another company whose appeal to stock pickers has surged since the turn of the year, its market value jumping 12% in that time.

Unlike On The Beach, though, quite why this share is surging is a bit of a mystery to me, I’m afraid. Okay, its prospective P/E multiple of 7.6 times makes it cheap. Predicted dividends of 4.2p and 4.5p for 2019 and 2020 respectively will have made income investors sit up too, because of their subsequent 4% and 4.3% yields.

But the car dealership’s share price rise comes against a backcloth of rising fears over Brexit and whether this will prolong the economic downturn Britain is currently experiencing, a phenomenon that official figures show is pummelling auto sales (SMMT figures showed new car sales dropped 7% in 2018 to 2.37m units). In this environment it’s not difficult to foresee Lookers’ share price reversing sharply again. And for this reason I am prepared to give it a wide berth.

The post These top secret dividend growth stocks are surging in value. Have you missed the boat? appeared first on The Twelfth Magpie.

More reading

• Forget meal deals! Here’s how £8 a day could be worth £357,000
• With a 7% yield, is this dividend share a no-brainer?
• The CMC Markets share price is smashing the FTSE 100 in 2026. Is there an opportunity here?
• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?

Royston Wild 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.

To be honest, this doesn’t seem like much of a reward for your hard work.

Although I’d always aim to keep some cash available for rainy days, I prefer to put most of my savings to work by investing in dividend stocks. This tends to provide a higher level of income, and the potential for long-term capital gains.

Today I want to look at two FTSE 250 dividend stocks from my watch list.

Signs of improvement

Cycling and car accessory retailer Halfords Group (LSE: HFD) needs no introduction. But the firm’s after-tax profits have fallen in each of the last four years, as rising costs and a changing mix of products have put pressure on margins.

Thursday’s half-year results from the company suggest more of the same. Although like-for-like sales rose by 2.5% and group revenue was 1.9% higher at £599.9m, underlying pre-tax profit fell by 17.1% to £30.5m.

The company said that strong sales of electric bikes, tools, dash cams and cleaning products helped to offset a slow start to the year. Sales of car repair and maintenance services through the Autocentres business also improved, rising by 3.3% on a like-for-like basis.

Buy, sell or hold?

Halfords’ underlying operating margin was 5.3% during the first half of the year, down from 6.5% during the same period last year. That’s a disappointing result in my view, although today’s figures do appear to be broadly in line with broker forecasts.

One highlight was free cash flow of £34m, up from £30m for the same period last year. Cash generation has always been a strength of this business, and it’s good to see this continue despite lower profit margins.

The shares are priced for a low-growth future, trading on just 10.5 times 2019 forecast earnings. This year’s forecast dividend of 18.1p per share looks affordable to me and would give a yield of 5.8% at the current share price.

In my view this out-of-favour retailer could be worth considering as an income buy.

Better than expected

Sales of new cars in the UK have fallen by 7.2% so far this year, according to industry figures. A slump in diesel sales is mainly to blame, but so too are supply bottlenecks caused by the new WLTP emissions testing regime.

Despite these headwinds, dealership group Lookers (LSE: LOOK) expects to deliver results in line with previous expectations this year. Indeed, the firm said that a shortage of supply in September enabled it to increase profit margins on new cars sold last month.

Although overall gross profit from new car sales fell by 5% during the nine months to 30 September, gross profit from used cars rose by 10% and after-sales profits were 6% higher.

In a statement to investors, management pointed out that new car sales are still at historically high levels, despite this year’s fall.

In my view, this suggests further falls in new car sales are possible. But if you have a more optimistic outlook, then Looker shares could be worth a look. Trading on 7.3 times forecast earnings with a 4% yield, they don’t look expensive to me at the moment.

The post Forget the cash ISA! I think this FTSE 250 dividend stock could provide a reliable 5.8% income appeared first on The Twelfth Magpie.

More reading

• Forget meal deals! Here’s how £8 a day could be worth £357,000
• With a 7% yield, is this dividend share a no-brainer?
• The CMC Markets share price is smashing the FTSE 100 in 2026. Is there an opportunity here?
• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?

Roland Head 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.

In this piece I’m going to discuss why these companies are performing so differently, and which one I’d rather buy.

Too cheap to ignore?

Car dealers look cheap at the moment and Lookers (LSE: LOOK) is no exception. The company confirmed this morning that it’s on track to hit consensus profit forecasts for the full year. If that’s correct, then the shares currently trade on just 7.8 times forecast earnings and offer a yield of 3.8%.

Why so cheap? One reason is that profits appear to be falling. Despite turnover rising by 5% to £2.58bn, the group’s adjusted pre-tax profit fell by 14% to £43.1m during the six months to 30 June.

UK new car registrations have fallen by 5.5% so far this year, compared to the same period last year. But Lookers reported growth in used car sales and aftersales, and the group’s gross profit for the period rose by 2.5% to £270.5m.

The main reason for the fall in profit was a big increase in administrative costs, which rose by 26% to £80.4m during the first half. The company says this was due to increases in salary, pension, rent and utility costs.

Interest costs for stock financing also rose and I suspect interest rates for car buyers will soon follow. This could slow new car sales even more.

I’m still waiting

Lookers has a decent balance sheet, helped by about £340m worth of property, plant and equipment.

But adjusted earnings are expected to fall by 7% to 13.5p per share this year. And after years of record sales, I fear the downturn in the new car market might only just be getting started. I’m avoiding new car dealers for now.

One car dealer I do own

There is one car business I am bullish about. Used car supermarket Motorpoint Group (LSE: MOTR) is the largest used car retailer in the UK.

I’m a shareholder of this FTSE 250 business, which only sells cars that are under three years old and have less than 25,000 miles on the clock.

By selling from 12 large outdoor sites, costs are relatively low and returns can be high. Although the group’s operating margin last year was just 2.1%, Motorpoint generated a return on capital employed of 76%. So for every £100 of capital invested in the business, the firm generated £76 of operating profit. That’s outstandingly good.

What could go wrong?

Customers seem to like this business. An impressive 26.2% of sales were to repeat customers last year, and the company scores highly on internet review sites.

The main risk I can see is that the company will be caught out by a combination of falling used car values and a slump in demand. This might be made worse by rising interest rates.

In fairness, there’s no sign of any problem yet. Adjusted earnings per share rose by 31% to 16.7p per share last year. Analysts expect this figure to rise by 14.4% to 19.1p during the current year, putting the stock on a forecast P/E of 11.9 with a prospective yield of 3.1%.

I believe Motorpoint could continue to drive ahead of the FTSE 100 and remain happy to hold.

The post Why this small-cap dividend growth stock is storming ahead of the FTSE 100 appeared first on The Twelfth Magpie.

More reading

• Forget meal deals! Here’s how £8 a day could be worth £357,000
• With a 7% yield, is this dividend share a no-brainer?
• The CMC Markets share price is smashing the FTSE 100 in 2026. Is there an opportunity here?
• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?

Roland Head owns shares of Motorpoint. 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 reason for investor caution is clear. The company is drowning in debt. At the end of 2017, JackpotJoy had an adjusted net debt balance of £387m and an adjusted leverage ratio of 3.6 times.

However, while the debt mountain is concerning, JackpotJoy is a cash cow and it’s rapidly paying off creditors. The company generated a free cash flow from operations of £97.8m last year, giving a free cash flow yield of 15.5%. 

Management is committed to cleaning up the balance sheet over the next few years and it has the resources to do so. A recent trading update declared that revenues during the first two months of 2018 have increased by 12%. That puts the company on track to generate a similar debt-reduction performance again in 2018, as well as meeting other obligations.

And once debt is brought down to a more sustainable level, I believe JackpotJoy will start returning excess cash to investors, so this could also be a future dividend champion.

Less than cash 

Another out-of-favour recovery play I like is Game Digital (LSE: GMD).

Like many of its high street peers, Game is suffering from its high fixed cost base (rental leases), rising costs overall, as well as shifting consumer shopping habits. These pressures resulted in the group announcing a 56% decline in profit before tax from its core retail operations for the 26 weeks ended 27 January. 

Thanks to a positive £2.6m contribution from its growing Esports business for the period, overall profit only declined 26%. But more importantly, Game generated £32.2m in cash from operations during the period, up 25.3% year-on-year. 

Game ended the period with £85m in cash and equivalents with almost no debt, compared to a market capitalisation of £63.6m at the time of writing. Put simply, the company as a whole is now worth less than the value of cash on its balance sheet, making it a traditional value play.

Including intangible assets, the shares are trading at a price-to-book value of 0.5.

Misleading figures 

My final ‘absurdly cheap’ pick is motor retail and aftersales company Lookers (LSE: LOOK). 

Shares in this car dealer have lost more than 27% of their value over the past 12 months because of concerns about the state of the car market in the UK. Indeed, after years of above-average growth, fuelled by easy credit, new car sales slumped 15.7% in March, extending the run of falling sales to 12 months. As a result, fearing bad news ahead, investors have fled car stocks.

I believe this presents an excellent opportunity for value investors. You see, while headline numbers show car sales in the UK are collapsing, according to official figures from the Department of Transport the average age of vehicles on Britain’s roads is now more than eight years, its highest level since the turn of the century. Nearly 20% of cars are at least 13 years’ old. Sooner or later, drivers will have to replace these vehicles. 

And when sales growth does pick up, shares in Lookers could see a substantial re-rating. The stock is currently trading at a forward P/E of 6.7, which, in my opinion, is factoring in the worst case scenario and leaves no room for positive surprises.

The post I believe these 3 stocks are absurdly cheap right now appeared first on The Twelfth Magpie.

More reading

• Forget meal deals! Here’s how £8 a day could be worth £357,000
• With a 7% yield, is this dividend share a no-brainer?
• The CMC Markets share price is smashing the FTSE 100 in 2026. Is there an opportunity here?
• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?

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.