Supermarket sweep

The supermarkets have emerged as relative winners from the pandemic and lockdown. In the UK, none come bigger than Tesco (LSE: TSCO). As non-essential shops, bars and restaurants have been forced to shut their doors, our spending has inevitably shifted to the supermarkets. And online delivery means that we don’t even need to leave our homes.

Tesco’s first-half results (up to end of August) showed that group revenue rose 7%, largely due to increased food sales. Sales rose strongest during the first lockdown period back in the spring, which bodes well for the current lockdown and any more thereafter. Its online business seems to have benefited the most, with second-quarter (spring) sales surging 90% from the year before.  

Tesco is in process of selling its Thai and Malaysian businesses. This should bring in around £8bn, of which £5bn will be returned to shareholders in the form of a special dividend. Looking at the current share price, that implies a 20%+ payout. And that’s on top of the current dividend yield of around 4%. Quite frankly, that seems too good to be true. It’s what makes it, in my opinion, one of the best shares to buy now.

First-half net profits were up 44% from last year, at £465m. Impressively, that’s after over £500m of Covid-related expenses. With these such costs already incurred, and with greater experience of the Covid operating environment, margins should improve in the second half. Directing expenditure away from its clothing business and towards food should improve profits further. Taking all that into account, I think Tesco shares look really attractive.

Consumer staples among the best shares to buy now

Another safe company in the current climate is McBride (LSE: MCB), I feel. It manufactures a range of cleaning and personal care products, from hand sanitiser and bleach, to aerosols and dishwasher tablets. As well as selling products under its own brands, the group also produces products on behalf of other companies.

The pandemic and subsequent focus on hygiene have been a real boon to the company’s sales. Bleach and surface cleaning sales rose by 15% in the six months to the end of June, while sales of dishwasher tablets and liquids were up 13%. With there being little evidence of the pandemic abating any time soon, I think this focus on hygiene is here to stay. That should boost McBride’s revenues for the foreseeable future.

£10m worth of exceptional items dragged full-year profits below those of the year before. But without these, profits would have been much healthier and the shares would actually look cheap. A new company strategy centres around increasing revenues to €1bn by 2025. That’s 27% above last year’s revenues. If this growth materialises, then it should feed through to the bottom line. To top it off, McBride also plans to buy back up to 10% of its own shares in the next year. And that’s why I think it’s another one of the best shares to buy now.

The post The best shares to buy during lockdown? Here’s what I think appeared first on The Twelfth Magpie.

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Thomas has no position in any of the shares 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.

According to the manufacturer and supplier of private label products, while revenues are still growing, it’s having trouble passing rising costs on to customers. And while management expects raw material costs to fall back in the second half of 2019, the group is also facing problems with its delivery network. “Distribution costs continue to rise beyond our previous estimates due to market rates and efficiency challenges driven by logistics capacity shortfalls and internal service gaps,” the trading update reported.

Considering all of the above, management now expects adjusted profits before tax to fall between 10% to 15% in 2019. 

Time to sell

I can see why investors were quick to sell McBride following this disappointing trading update. Looking over the group’s historical numbers, it’s clear the business has been struggling to grow for some time, and this latest set back seems to suggest that management can’t get it right.

Manufacturing private label household and personal care products is a low margin business — the company’s operating profit margin has averaged 4.3% for the past three years — so only a slight rise in costs can have a significant impact on the bottom line. 

With that being the case, even though McBride is currently dealing at a forward P/E of 5.5, I would avoid the stock for the time being. At this point it’s difficult to tell when the business will return to growth, and Brexit disruption could severely impact the company. 

Growth machine 

On the other hand, FTSE 100 wealth manager St. James’s Place (LSE: STJ) seems to be an unstoppable growth machine. 

According to my research, its earnings per share have expanded at a compound annual rate of 5.3% over the past six years, which has supported a five-fold increase in the group’s dividend payout to investors. The stock currently supports a dividend yield of 5.1%, above the FTSE 100 average of around 4.7%. 

Compared to McBride, St. James’s is, in my opinion, by far the better investment. It’s not just the firm’s dividend growth that leads me to that conclusion. The company also has a much stronger brand and economic moat. The business is recognisable all over the UK as one of the country’s premier wealth managers. By comparison, McBride lacks the same brand awareness. 

And I think now could be the perfect time to snap up shares in St. James’s following a weak fourth quarter trading performance that put investors off the company. 

Perfect opportunity 

Due to market volatility, investor inflows to the wealth manager slowed, and the group posted a fall in assets of £5bn in the fourth quarter.

However, the wealth manager still succeeded in recording net inflows of £2.6bn as clients continued to seek its face-to-face advice. Market losses weighed on overall assets under management, which declined to £95.6bn, down from £100.6bn at the end of September. 

Because markets have recovered substantially since the end of 2018, I think that when the group next reports its assets under manageent figure, we will see a strong recovery. I think it might be a good idea to buy in before we get the numbers.

The post A 6% FTSE 100 dividend growth stock I’d buy today, and a falling knife I’d sell 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.

Buying the right stocks when they’re unloved by the market can lead to handsome rewards for investors. I reckon Aviva and McBride are both oversold and I see them as good contrarian buys today.

Competitive advantage

McBride is the leading European manufacturer and supplier of contract manufactured and private label products for the domestic household and commercial cleaning markets. The company has faced a challenging backdrop over the last year or so. And it said today that this has continued in the three months since its last financial year-end of 30 June.

Raw material, packaging and logistics costs were slightly higher than anticipated, but were mitigated by improved sales volumes and lower overheads. The company’s scale gives it a competitive advantage in the current challenging costs environment. This has seen some competitors go bust. Meanwhile, McBride said today: “The group is strongly positioned to exploit further growth and margin opportunities in the coming year and beyond.”

Bargain basement

At the current share price, the company trades on a trailing 12-month price-to-earnings (P/E) ratio of 10.5, and this falls into the bargain basement of single digits (9.2) on forecast 12-month earnings growth of 14%. The resultant price-to-earnings growth (PEG) ratio of 0.75 is also highly attractive, because it’s well to the good value side of the PEG fair value marker of one. Finally, a prospective dividend yield of 3.5% looks rock solid, with the payout being covered over three times by forecast earnings.

Pause for thought

Aviva’s metrics are even deeper into value territory. Its trailing 12-month P/E  is 7.4 and this falls to just 6.7 on forecast 12-month earnings growth of 11%. The PEG ratio is 0.6, and the dividend yield is a whopping 7.5% (covered a healthy two times by forecast earnings).

When a P/E is as low as Aviva’s and a dividend yield as high (among the best ‘bargain’ metrics in the FTSE 100), it should give us pause for thought. Regulatory scrutiny of lifetime mortgage products and the announcement of the departure of Aviva’s chief executive earlier this month are unlikely to have helped sentiment, but I don’t see these things as justifying such a low valuation for the company.

Footsie bargain

Of course, as with big banks, you really need to be an expert on the complexities of large-scale, multi-line insurers like Aviva to spot any hidden risks in the business, or nasties in the accounts. However, I take comfort from the fact that financial data website DigitalLook has no City broker out of 19 recommending the stock as a sell.

Moreover, shrewd hedge funds that are adept at unearthing problem companies and shorting their stock, appear to be uninterested in Aviva. Certainly, there are no short positions above the disclosable threshold of 0.5%. All in all, I think Aviva might just be the bargain of the FTSE 100.

The post Why the Aviva share price and 7.5% dividend yield may make it the bargain of the FTSE 100 appeared first on The Twelfth Magpie.

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G A Chester 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 believe FTSE 100 household goods giant Reckitt Benckiser (LSE: RB) is a wonderful company and that it’s currently trading at a fair price. I’ll come back to it shortly, but first I’m going to look at a smaller sector peer, McBride (LSE: MCB), which released its annual results today.

Bad year

McBride manufactures and supplies household and personal care products that retailers sell under their own labels. It describes itself as the leading European company in its field. I last wrote about it a little less than a year ago. It was making good progress toward its target of increasing its operating margin to 7.5% and the shares were trading on 13.7 times forecast earnings at a share price of 215p.

My positive view on the stock last year proved to be ill-judged. After profit warnings this year in January and July, the shares have fallen to around 130p (little changed on today’s results), valuing the company at £237m. The results showed a fall in operating margin to 5.5% from last year’s 6.6%. Has McBride’s business gone off the rails or is it suffering a temporary setback?

Competitive advantage

Last year’s headwinds, including high input cost inflation, were even more damaging to many of McBride’s competitors. A key rival in Germany went into administration and there are continuing reports of others in difficulty. McBride should benefit as a result. Disposals of its skincare business in the Czech Republic and its lossmaking European Personal Care Liquids business should also help, as should its acquisition of a Nordic supplier in the growth segment of dish-wash and laundry products.

I believe McBride’s scale and cost advantage within its supply chain give it a decent competitive advantage. On this basis, and with it trading on just 8.9 times forward earnings with a running dividend yield of 3.3%, I’m inclined to rate it a ‘buy’.

Quality blue-chip

Brands powerhouse Reckitt Benckiser, whose stable includes Dettol, Durex and Nurofen, is truly a blue-chip business. At a current share price of around 6,500p, its market cap is £46bn. It can charge high prices for its trusted brands. As my Foolish colleague Roland Head noted when reporting on its strong half-year results in July, the firm’s products are part of the fabric of life for many millions of people.

Highly valuable brands and good management show up in the group’s fantastic operating margin — 23.6% in the latest period. Over the years, Reckitt has been adept at adapting its business for continuing strong growth through shrewd and selective strategic acquisitions (and disposals). Last year’s £13bn acquisition of infant formula business Mead Johnson is already shaping up nicely.

I’ve said in the past that I’d be happy to pay up to 25 times forward earnings for a business of Reckitt’s quality. As the rating is currently 19.7 times, with a running dividend yield of 2.6%, I rate the stock a ‘buy’.

The post A FTSE 100 growth and income stock that should pay you for the rest of your life appeared first on The Twelfth Magpie.

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G A Chester 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.

Despite this, the stock still trades on a relatively low valuation. Alongside another cheap stock which released results on Tuesday, could it be worth buying for the long term?

Improving outlook

As mentioned, the price of oil has risen significantly in recent months. In fact, it is up by around 50% in the last year, and this has improved the outlook for a number of oil and gas producers. It means that the focus on cost-cutting and efficiency of recent years has been transferred to an aim to increase production in many cases, with Gulf Keystone Petroleum set to increase gross production capacity over the next 12 to 18 months.

Looking ahead, the company is expected to deliver a substantial rise in pre-tax profit over the next two years. It is forecast to rise from £14m last year to £49m this year, followed by a further increase to £61m next year. Even though its shares have risen sharply in the last 12 months, they still seem to offer a wide margin of safety. For example, they trade on a price-to-earnings (P/E) ratio of 10.5 using 2019’s forecast earnings. This suggests there could be further upside potential.

Certainly, the oil price could be volatile and there is no guarantee that it will continue to rise. However, with what seems to be a bright future, the risk/reward ratio of Gulf Keystone Petroleum appears to be attractive at the present time.

Bargain buy?

Also offering growth at a reasonable price is consumer goods producer McBride (LSE: MCB). It released a trading update on Tuesday that showed it has endured a challenging year. It now expects profit for the full year to be towards the lower end of analyst expectations, with weaker sales in May and June being the primary reason for this.

Clearly, this is disappointing news for investors. However, the company is expected to return to growth in the 2019 financial year, with its bottom line forecast to rise by around 19%. This puts it on a price-to-earnings growth (PEG) ratio of 0.5, which suggests that it offers a wide margin of safety.

Following McBride’s trading update, its share price fell by around 6%. This suggests that investor sentiment remains weak following a 12-month period in which it has lost a third of its value. However, with the sale of its European Personal Care liquids business for £12.5m being announced on Tuesday and the company having such a low valuation, it could offer impressive returns over the long-term.

The post Has the GKP share price finally turned a corner? appeared first on The Twelfth Magpie.

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Peter Stephens 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.

As such, stocks that are able to do so could experience higher demand from investors over the medium term. This could lead to share price growth for such companies, thereby increasing their total return prospects. With that in mind, here are two smaller companies that could be strong income plays in the long run.

Mixed performance

Reporting on Thursday was private label household and personal care products specialist, McBride (LSE: MCB). The company’s first half performance was somewhat disappointing, with revenue falling by 0.6% at constant currency, while adjusted operating profit was one-third lower versus the same period of the previous year.

The business has experienced margin pressure due to higher inflation. This has caused difficulties in some of its divisions, although it is putting together a new strategy to try and transform its performance. The business continues to operate in line with market expectations, while it remains confident in the growth opportunity that may be ahead in the medium term.

With McBride’s earnings due to rise by 16% in the next financial year, its future appears to be bright. Dividends per share are due to increase by around 17% in the next financial year, which puts it on a forward dividend yield of 3.5%. And with dividends being covered nearly three times by profit, there seems to be scope for further dividend growth over the long run.

Robust growth

Also offering impressive income prospects in the small-cap arena is advertising and PR company M&C Saatchi (LSE: SAA). The company has a solid track record of dividend growth, with shareholder payouts having increased at an annualised rate of 14% during the last five years. And with dividends due to rise by over 6% in each of the next two years, inflation-beating income growth looks set to be ahead for the company’s shareholders.

Of course, M&C Saatchi’s financial performance is closely linked to the outlook for the global economy. On this front, there seems to be a positive outlook, with the prospects for the world economy being generally upbeat. This suggests that further earnings growth could be ahead, with the stock forecast to post a rise in its bottom line of 7% this year and 8% next year. This puts its shares on a price-to-earnings growth (PEG) ratio of just 1.7. This indicates that they may offer growth at a reasonable price.

With dividends being covered 2.4 times by profit and it yielding 2.7%, the company’s income outlook seems to be sustainable. As such, and while a potentially cyclical stock, the income potential for investors in the business seems to be high.

The post 2 small-cap dividend stocks I’d buy with £1,000 today appeared first on The Twelfth Magpie.

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• 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?

Peter Stephens owns shares in M&C Saatchi. 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.

Earnings for the year to 30 June are now expected to be “broadly in line with the prior year”. Based on broker consensus forecasts, previous expectations were for adjusted earnings per share to rise by around 20% this year.

What’s gone wrong?

McBride’s main business is producing own-branded cleaning and personal care products. When I added the shares to my portfolio last April, I saw the business as a potential turnaround and growth opportunity. Unfortunately, this Manchester-based firm has been a disappointing performer so far.

The problems appear to lie in two areas. The first is that revenue from the Personal Care & Aerosol (PCA) division fell by 12.1% during the six months to 31 December. Around half of this decline was due to a deliberate decision to exit unattractive contracts. That might have been sensible, but the group has yet to replace these lost sales. Management says it is “currently developing an accelerated transformation plan” for the PCA division.

The second problem is that costs are rising. In today’s statement, management cited higher costs for raw materials, labour and transportation.

Although revenue from the Household division is now expected to rise by a “mid-high single-digit percentage” during the second half, this won’t be enough to prevent the group missing its profit targets.

Buy, sell or hold?

McBride says that in order to meet a recent surge of orders for the Household division, it’s going to postpone planned efficiency programmes. I’m a bit concerned by this ad-hoc approach, given today’s other news. It sounds to me as though management control of the business might not be as tight as I’d like to see.

Many of the company’s customers are big supermarkets chains. Today’s news suggests to me that these heavyweight buyers are using their size to put further pressure on the firm’s profit margins. I fear that debt could also start climbing again.

I’m not going to act immediately, but I’m tempted to sell my shares. I certainly won’t be buying any more.

One stock I would own

One consumer goods stock I rate highly is soft drinks firm A. G. Barr (LSE: BAG). Unlike McBride, the maker of drinks including Irn Bru, Rockstar and Tizer has delivered consistently high profit margins and steady growth for many years.

Barr’s operating margin has averaged 15% since 2012. Over the same period, the group’s return on capital employed (ROCE) has averaged 20%. A high ROCE is generally seen as a good indicator of a business that’s able to fund its own growth and make profitable investments in its business.

Cash generation is also strong. This has helped the firm to deliver average dividend growth of 9% per year since 2012, while keeping its balance sheet almost debt-free.

The stock currently trades on a 2018/19 forecast P/E of 20, with a forecast yield of 2.4%. Although I’d prefer to buy on the dips, this is a stock I’d be happy to add to a long-term portfolio at current levels.

The post Should I sell falling knife McBride plc after today’s 15% slide? appeared first on The Twelfth Magpie.

More reading

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• 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?

Roland Head owns shares of McBride. The Motley Fool UK has recommended AG Barr. 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 been making excellent progress. Last month, in its annual results for the year ended 30 June, it reported a rise in operating margin to 5.6% from 4.8% the prior year and an increase in ROCE to 27.7% from 23.4%. Earnings per share (EPS) advanced 18%.

However, after releasing a trading update today ahead of its AGM, its shares are down 7% at 215p, as I’m writing, valuing this FTSE SmallCap firm at £392m. Has there been a fundamental change to McBride’s growth prospects or is the dip no more than ‘noise’ and a great opportunity to buy a slice of the business at a discount price?

On track to deliver

Ahead of today’s update, the City was forecasting 20% growth in EPS to 15.7p for the year to 30 June 2018. After the hefty fall in the shares, the forward price-to-earnings (P/E) ratio is an undemanding 13.7, while the price-to-earnings growth (PEG) ratio of 0.7, is nicely on the value side of the PEG fair-value marker of one.

McBride said today: “At this early stage of the year the Board is comfortable that the business remains on track to deliver its full-year expectations.” So why the fall in the shares?

The company indicated in last month’s results and reiterated today that it expects the current year’s financial performance to be weighted towards the second half of the year, as increases in revenues from its growth strategy begin to come through. Perhaps the market is concerned by the amount of ground the company has to make up after reporting Q1 revenue today 6.7% lower at constant currency than the prior year.

However, based on management’s excellent record to date, I’m happy to go along with its second-half-weighting projections. As such, I view today’s fall in the shares as a great opportunity to buy at a discount.

More than meeting targets

Arrow Global (LSE: ARW) is another FTSE SmallCap firm with eye-catching financial targets. In fact, it’s currently exceeding its key targets of high-teens EPS growth and mid-20s return on equity.

Arrow buys portfolios of non-performing loans from banks, retailers, utilities and so on at a discount to face value and sets up affordable repayment plans. It’s been growing its business at home and on the continent for over 20 years and has a credible ambition to become Europe’s leading purchaser and manager of debt.

At a current share price of 412p, the company is valued at £722m. City analysts are forecasting EPS growth of 26% to 32.85p for the current year, giving a P/E of 12.5 and a PEG of 0.5. The valuation becomes even more attractive when we look to 2018. EPS is forecast to increase a further 23% to 40.5p, bringing the P/E down to 10.2 and the PEG down to nearer 0.4. As such, Arrow’s shares look very buyable to me at current levels.

The post These small-cap growth stocks could still make you amazingly rich appeared first on The Twelfth Magpie.

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• 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 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 most prominent feature of today’s full-year results announcement is a proposal to return €25m of the firm’s almost €34m net cash pile to shareholders through a tender offer.

Cash back

If approved at the AGM, the company will offer €6.75 per share to those wishing to sell back up to 12% of their holding to the firm. Based on today’s exchange rate, that’s a premium to the current 520p share price running at about 19%, by my sums.

The firm thinks the money’s better in its investors’ pockets than sitting on the balance sheet earning low interest, and the €9m it is hanging on to will be enough to invest in further growth. The preferred method of expansion is organic, the directors reckon, but it seems likely some will go into more bolt-on acquisitions, I reckon.

Chief executive Anne Heraty explains in the report that “CPL has a strong balance sheet with net assets of €103.7 million generated over the 27 years of continuous profitability.” That record continues with these results, which show revenue up 5% compared to a year ago and profit before tax rising 3%. The directors pushed the total dividend up 4.5%.

Expanding abroad

Around 25% of fee income comes from abroad, and during the year the company opened offices in Munich and Boston and has more than 40 offices in 10 countries. Such geographic spread should help to minimise the effects of any regional economic weakness that may appear. The report mentions Brexit as a source of uncertainty, but the firm thinks it can navigate through any fallout that could weaken trading in Britain or continental Europe.

City analysts following the firm predict a 17% uplift in earnings for the current year to June 2018, so there’s no sign of trading weakness yet. Meanwhile, the forward price-to-earnings (P/E) ratio runs at just under 11 and the forward dividend yield at 2.2%. Those forward earnings should cover the payout more than four times. I think CPL Resources looks like good value.

Defensive growth

McBride (LSE: MCB) also reported full-year results today with a 5.9% decline in revenue offset by a 21% rise in cash from operations and an 18% lift in adjusted diluted earnings per share. Although tough markets caused an easing of revenue, the firm’s focus on costs and margins has delivered a pleasing outcome, which makes the recent restructuring exercise look worthwhile.

The company makes laundry, household cleaning and personal care products for supermarkets and others to sell under their own name and manufactures from centres in six countries across Europe. I reckon the firm’s business has defensive qualities similar to those of Unilever, PZ Cussons and others, but without the strength of brand-backing.

Net debt declined by 17% and part of the firm’s recent recovery plan involved refinancing with its lenders, which reduced ongoing interest payments. Now the directors have their sights set on growth and backed their optimism with a 19.4% hike in the dividend.

Meanwhile, City analysts following the firm expect earnings to advance 20% for the year to June 2018, which isn’t bad for a forward P/E running at just over 12.

The post 2 small-cap flyers 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?

Kevin Godbold has no position in any of the companies mentioned. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK owns shares of PZ Cussons. 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 look at two firms I believe could grow much faster than expected over the next few years.

A growing market

Sales of own-brand consumer products in supermarkets have been rising steadily for years. But have you ever wondered who makes these products? In Europe, one of the market leaders is FTSE SmallCap firm McBride (LSE: MCB).

This group specialises in household cleaning and personal care products, and supplies many of Europe’s biggest retailers. Today McBride announced the acquisition of Danish firm Danlind, which should increase its foothold in the dishwashing and laundry markets.

Management expects the deal to result in “significant commercial, technical and operational” cost savings. No figures were provided, but the group did say that Danlind was expected to generate earnings before tax, interest, depreciation and amortisation (EBITDA) of £2.5m this year on a standalone basis.

Given that McBride is paying a total of £38.8m for Danlind, this gives the deal an effective valuation of 15 times EBITDA. That’s a fairly full price in my view. Indeed, management admits that while earnings will rise immediately, the deal’s post-tax return on invested capital won’t rise above McBride’s cost of capital — essentially its borrowing costs — until the third year of ownership.

Despite this caveat, I’m positive about the outlook for McBride. I believe the market for good quality own-brand products is likely to keep growing. For example, in Eastern Europe the market share for private label is currently about 20%, according to McBride. That’s a lot less than the 40% level seen in the UK.

McBride has made big improvements in profitability over the last few years. It’s now focusing on growth. The shares trade on a reasonable 13 times 2017 forecast earnings and offering a 2.4% yield. I believe long-term investors could enjoy significant profits.

Too cheap to ignore?

If McBride is affordable, I believe Character Group (LSE: CCT) could be plain cheap. This £100m company specialises in making branded toys under licence. Examples of the group’s brands include Peppa Pig and Marvel.

Growth has slowed this year after a strong run. This has pulled the group’s share price back from a high of 550p, to today’s price of about 480p. But I think this sell-off may have gone too far.

This business is extremely profitable. The group generated a return on capital employed of 58% in the 2015/16 financial year. This means that cash generation is very strong, and Character has had net cash on its balance sheet since 2015.

Earnings are expected to have risen by 6% during the year ended 31 August. Further growth of 8% is expected during 2017/18. The shares also offer a forecast dividend yield of 3.8%, which should be well covered by free cash flow.

For all of this, investors are being asked to pay a forecast P/E of 9.3, falling to a P/E of 8.7 for the year ahead. In my view, that’s probably too cheap. I believe Character Group could be a profitable buy at current levels.

The post Why these under-the-radar growth stocks could help you retire rich appeared first on The Twelfth Magpie.

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Roland Head owns shares of McBride. 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.