CMC Markets

My first pick for next year is online trading platform provider CMC Markets (LSE: CMCX). Shares in this company have sold off recently following a reduction in market volatility and, consequently, a fall in net operating income and profits. The dividend has been slashed as a result. 

Considering how much of an anomaly 2020 was, this slowdown was always likely. Compared to pre-Covid-19 numbers, however, CMC is clearly growing well. Its evolving stockbroking business is going great guns and the company is considering separating this from its spread betting business in the future. 

Obviously, further falls are possible and the ongoing threat of regulation in its industry will put some off. However, the shares look tempting at less than 11 times earnings. There’s a stack of cash on the balance sheet and founder and CEO Lord Cruddas still owns a huge stake.

Perhaps most importantly, a flurry of anxiety in the markets as we enter 2022 could cause a rebound in levels of client activity. 

Britvic

For a nice mix of growth and income, I’d snap up stock in Britvic (LSE: BVIC). The Hemel Hempstead-based business owns a portfolio of highly ‘sticky’ brands such as Tango, J20, and Robinsons. It also has an exclusive agreement to produce and distribute Pepsi, 7UP and Mountain Dew in the UK on behalf of US giant PepsiCo until the end of 2040.

Like most businesses, Brivic’s fortunes could be dealt a blow if pandemic-related restrictions were to get particularly tough. However, the eventual, inevitable return to normality should play into the company’s hands as people return en masse to restaurants, bars and cafes.

Its shares trade at a little less than 16 times earnings. That’s pretty cheap compared to others in the sector. It’s also attractive considering the company’s defensive qualities.

As mentioned, there’s a nice dividend stream too. The 3% yield looks easily covered by profits, meaning a cut to Britvic’s payout looks pretty unlikely. 

Somero Enterprises

Somero Enterprises (LSE: SOM) has been one of the top-performing stocks in my portfolio in 2021. I think there could be even more to come in 2022.

Somero produces laser-guided machines that make concrete surfaces perfectly flat. Boring? Arguably. Essential? Yes. Profitable? Increasingly so. The huge rise in demand for warehouse space from retailers has been a boon for this company and Covid-19 has only served to boost this need further. 

Earlier this month, the small-cap announced that it expected to exceed previous guidance yet again for 2021. Thanks to strong momentum in North America, revenue will now come in around $130m — $10m more than thought in September. Better still, project backlogs are seen “extending well into 2022“. 

Despite this good news, the market still looks to be cautious about Somero. As I type, the shares are trading at just 11 times forecast FY22 earnings. That still looks like a steal for a leader in a specialised market, particularly one that generates high margins and returns on the cash it reinvests into itself. Other draws include its robust finances and a big 6.9% dividend yield.

Rio Tinto

FTSE 100 mining giant Rio Tinto (LSE:RIO) hasn’t had the best of years. Nonetheless, I see two big attractions.

The first is the huge dividend on offer. Analysts currently have the company returning 457p per share for FY22. Based on the current share price, that’s a yield of 9.5% — more than adequate compensation for being made to wait for a recovery. The payout should also serve as a great way of outpacing inflation (which shows no signs of slowing just yet).  

The second attraction for me is the potential for a commodities supercycle over the next few years. Huge amounts of copper, lithium and aluminium will be required to meet the demand for electric vehicles and clean energy solutions. This should do the £80bn cap’s bottom line no harm at all.

Obviously, there’s nothing to say that Rio’s share price won’t fall further. As a ‘buy and hold’ dividend stock for 2022 and beyond, however, I think this is among the best available in the FTSE 100. The valuation, at just seven times forecast FY22 earnings is low too.

Boohoo

Suggesting that Boohoo (LSE: BOO) might be one of the best stocks to buy for 2022 sounds nothing short of fanciful right now. The fast-fashion giant’s value has plummeted this year as increased costs, corporate governance concerns, reduced sales guidance and higher levels of returns have all pushed investors to the exits.

It’s undoubtedly been a tricky year and problems may persist. However, the share price capitulation looks overdone to these eyes. Boohoo is far from being financially vulnerable. Thanks to some canny acquisitions over the pandemic, it also boasts a far larger portfolio of brands. The purchase of Debenhams, for example, opens up a lot of new markets, including make-up and homewares.  

Simplistic as it sounds, it can often be the case that this year’s losers turn into next year’s winners. I wonder if this might be the case with Boohoo. If the next update is even remotely better than forecast, we could see a squeeze on short sellers and the share price could fly. Surely the margin of safety has never been better?

Caution advised

In proposing the above, it’s necessary to clarify a couple of things.

First, I have no idea what will happen in 2022. Not a jot. In my defence, neither do the traders or fund managers that sit glued to their screens. If anyone says differently, feel free to chuck a glass of mulled wine over them. All any investor — professional or armchair — can do is make educated guesses and try to gauge risk correctly. If a few (or all) of my calls come off and beat the market return, I’ll be chuffed. I’ll also preemptively highlight the role of luck. 

Speaking of risk, it’s worth mentioning that my picks have been made with a degree of diversification in mind. While this will lead to lower returns than if I were to pick the best performing part of the market, this presumes that I already know which part of the market that is. And I don’t. Regardless of what may be going on in the world at the time, spreading my money around sufficiently should prevent me from making any impulsive and costly decisions.

Wishing all Fools a safe Christmas and New Year and a profitable 2022.

The post My 5 best stocks to buy for 2022 appeared first on The Twelfth Magpie.

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Paul Summers owns shares in Somero Enterprises and boohoo group. The Motley Fool UK has recommended Britvic, Somero Enterprises, Inc., and boohoo group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The ultimate form of passive income

Passive income from investing takes the form of dividends — a proportion of profits paid out to owners (usually twice a year) for holding shares in a company. What effort does this require on my part? Absolutely none, aside from the initial purchase. Zip. Nada. Compared to becoming a landlord or starting a side hustle on eBay, it has arguably the best trade-off between effort and reward going. 

Obviously, there’s some effort involved. To get started with investing, I first need to find ways of cutting down my monthly expenses to free up some money. On top of this, it’s also vital to buy everything inside a Stocks and Shares ISA. This protects all of the passive income I receive from the taxman. 

Of course, I also need to select which stocks to buy. Thankfully, there’s never been a shortage of these. 

Stocks that pay me

For years, I’ve owned shares in online trading firm IG Group. This company makes its money by charging fees to clients that aim to profit from the stocks market’s inevitable ups and downs. As one might have guessed, business has been rather good lately. Right now, IG offers a yield of 5.5%. In sharp contrast, the top Cash ISA pays just 0.67%.

Another example is Somero Enterprises. It manufactures laser-guided equipment to ensure concrete surfaces in warehouses are as flat as a pancake. With retailers desperate for space to hold their products as online shopping explodes in popularity, I think this company is in something of a sweet spot.

Actually, I know it is! On Tuesday, the small-cap upgraded its full-year guidance following stellar trading in its largest market, North America. Most of that will have happened while I was asleep. At 6.3%, Somero yields even more than IG!

Of course, if I wanted to reduce my workload even more, I could ask a professional fund manager to pick stocks for me. That said, this strategy involves paying fees which ultimately reduces the amount of income I’d hang on to. There’s no guarantee a pro will do a better job either. 

Nothing is guaranteed

Naturally, there’s a caveat to all of this. Just as I can’t be assured a perfect night’s sleep, nor can I assume that the stocks I own will always be in a position to pay out. In tough times, dividends can be cut as firms attempt to shore up cash. 

I see two ways of mitigating this risk. First, own a bunch of passive income-paying stocks from different sectors. As an illustration of this, both IG Group and Somero are market leaders at what they do but operate in very different spaces. Throw in a few more stocks and this diversification should go some way to protecting me if one or two struggle. 

A slightly more involved step is to check the extent to which a company’s profits cover its dividend. Although earnings will naturally vary from year to year, this should ideally be two times. Anything lower than one and that passive income stream looks vulnerable. A consistently rising dividend is another indication of health. 

The post Passive income! How I make money while I sleep appeared first on The Twelfth Magpie.

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Paul Summers owns shares in IG Group and Somero Enterprises. The Motley Fool UK has recommended Somero Enterprises, Inc. 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.

What’s got the market so excited?

Fantastic trading, that’s what! Revenues from the first half of 2021 came in at $64.4m. That’s an 82% jump from the same period last year.

Much of this rise was attributed to a “very strong and highly active” US market — the firm’s biggest — and customers attempting to make up for lost time last year. Demand for new warehousing due to the huge growth seen in e-commerce following the pandemic was another reason. Elsewhere, three of the company’s five international markets delivered revenue growth. 

Naturally, all this has been good news for Somero’s profits. Adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) jumped 183% to $24.6m. Margins also rose to 38%. On a statutory basis, pre-tax profit rocketed 213% to $23.5m.

An abundance of cash flow was also good news for those holding for income. A stonking 125% hike to the interim payout, to 9 cents per share (6.5p), was announced. Analysts currently have the firm down to return 29 cents (21p) for the whole year. That’s a chunky yield of 4% at the current share price. Even if I end up reinvesting this money in the company, I certainly won’t be turning that down!

Things definitely look positive. Following today’s very encouraging numbers and based on trading momentum going into H2, Somero hiked its full-year guidance. It’s now predicting record revenues of roughly $120m for the whole of 2021. A target of £42m for adjusted earnings has also been targeted.

As good as these numbers are, however, it’s the long-term prospects of Somero that I’m more interested in. On this front, I remain bullish given ongoing product development/launches, a growing workforce and expansion in markets like Australia. In fact, the firm is looking to begin increasing operational capacity by 35% towards the end of the year.

Still a buy

Somero traded on just 14 times earnings before the market opened. That’s a steal, in my (probably biased) opinion, especially as it consistently generates great margins and returns on capital. This cheap UK share is also a leader in specialised niche, giving it something of an economic moat.

However, this is not to say that there won’t be headwinds ahead. Trading clearly has the potential to be disrupted by ongoing issues with supply chains. Then again, it’s getting increasingly difficult to find a company/stock that won’t be affected by this issue. On a positive note, SOM did say today that it had “robust plans in place” to tackle this problem if it continues. 

Aside from this, one also needs to remember that construction is a cyclical industry. So, there’s certainly potential for the shares to jettison gains made over the last year (+150%) if the global recovery slows.

Again, however, I think Somero should be able to take any strain in its stride. Management expects the company to boast $36m in net cash at the end of the year. That’s a sufficient buffer for me to feel the risk/reward trade-off for this cheap UK share is still in my favour. 

The post Profits jump over 200% at this cheap UK share! I’ll keep buying appeared first on The Twelfth Magpie.

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• Up 132% and surging, how is this FTSE 250 share STILL so cheap?

Paul Summers owns shares in Somero Enterprises, Inc. The Motley Fool UK has recommended Somero Enterprises, Inc. 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.

Doubling my ISA: what will it take?

To double the value of my portfolio, I need to achieve an annualised return of around 15%. In other words, I need my capital to grow 15% in 2021, another 15% in 2022, and so on. This is how things would look if I used the nominal sum of £1,000.

Compound interest really is a wonderful thing. And this doesn’t include the impact of any reinvested dividends!

So, how do I hit this target?

Clearly, being invested in the best stocks helps. But what makes a company better than others? Everyone will have an idea about this.

A ‘meme stock’ investor would say that AMC Entertainment and GameStop would qualify. I respectfully disagree. Their share prices have certainly ‘popped’ in 2021 but have since flagged. They’re best left to traders, in my opinion. 

Personally, I don’t think I need to take on such risk to get a 15% annualised return. For me, the best ISA stocks are those that are leaders in niche markets, boast fantastic brands, have strong growth potential, and/or generate great returns on the money they invest. I think I have several in my portfolio already. These include kettle appliance maker Strix, equipment manufacturer Somero Enterprises, and online behemoth Boohoo. 

But let’s take a step back here. The fact that something is achievable does not mean it will happen, of course. Let’s briefly look at what things could stop me from achieving my goal.

What could go wrong

Unfortunately, there’s no guarantee my ISA stocks will perform. Last week alone showed just how unforgiving other investors can be with the share prices of Best of the Best and Avon Protection being pummelled. Both have previously scored highly on the things I usually look for.

Even if the companies I own do very well, they could still be held back by general market jitters. These days, investors are getting increasingly worried about rising inflation, for example. And even if this does prove ‘transitory’, there will always be another potential setback waiting in the wings to knock confidence. 

How I can improve my chances

Aside from hoping my stock-picking is on form, there are four other things I think I can do. 

1) Keep investing. This includes periods in which markets head south. It sounds simple but it’s harder to do in practice.

2) Go small. Smaller companies have the ability to grow at rates larger companies simply can’t. This can often lead to a huge uplift in share prices. 

2) Use up my ISA allowance. As well as continuing to invest, it would also be a good idea to use my £20,000 ISA allowance in full. The more money I put to work, the greater the potential impact of compounding.

3) Avoid frothy markets. A final, debatable point is that it might make sense to avoid markets (and companies) where valuations are looking stretched. Having more than doubled over the last year, the US market looks a little too hot to me right now. 

The post How I plan to double my Stocks and Shares ISA in 5 years appeared first on The Twelfth Magpie.

More reading

• The £15bn defence splurge that could send UK shares soaring in July
• Up 446% in 12 months! What’s next for the Ceres Power share price?
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• Forget meal deals! Here’s how £8 a day could be worth £357,000
• Up 132% and surging, how is this FTSE 250 share STILL so cheap?

Paul Summers owns shares in Strix, Somero Enterprises and boohoo group. The Motley Fool UK has recommended Avon Protection, Somero Enterprises, Inc., and boohoo group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

What’s happened?

This morning’s stonking gain is the result of yet another positive update from the laser-guided equipment manufacturer.  

Thanks to “stronger than anticipated trading” across the pond over the last six months, Somero now expects to beat its previous guidance on full-year revenue and earnings. The company had been expecting the former to come in around $100m and adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) to hit $31m. Importantly, this previous guidance was only given in May.

So, business is booming?

Today, Somero predicted that revenue would now hit $110m and adjusted EBITDA would be around $35m. It also expects its net cash position to rise above $33m. 

Positively, recent performance hasn’t been restricted to Somero’s main market. Elsewhere in today’s update, the small-cap stock stated that its operations in Europe and Australia had also made “meaningful contributions to growth“.

It sounds like there’s more to come too. Having enjoyed a seriously good last couple of months, it said today that trading momentum had continued into H2. With the US playing catch-up thanks to the pandemic, the AIM-listed company added that project backlogs still extend into next year. The growing need for warehouses and flat-as-a-pancake concrete floors thanks to the explosion in online shopping was also highlighted.

Would I still buy this small-cap stock today?

I think I would still buy it. There are a few reasons, in addition to the positive outlook mentioned above.

First, the valuation is still pretty tempting. While the cyclical nature of the construction industry will always be unattractive to some in the market, a forecast P/E of 15 before markets opened this morning looked very reasonable. Let’s not forget that Somero scores well on an enviable amount of ‘quality’ metrics for a small-cap stock. These include stonkingly high returns on capital and operating margins.

Second, Somero has a history of rapidly increasing its dividends. Sure, there will be the odd wobble along the way, such as last year. However, I think investors can be confident that they’ll continue receiving bumper payouts for some time to come. Although a growth investor by heart, I certainly won’t turn this income down. Since reinvested dividends contribute meaningfully to long-term returns, I’ll simply be throwing the money back at the company. 

Third, Somero isn’t resting on its laurels. The Fort Myers-based business is busy developing its pipeline of new products with the aim of expanding its market. Encouragingly, some of these are due for release in H2. I suspect there could be more positive news on this when interim numbers are confirmed in September. 

So, there are no risks?

Yet there are definitely still risks. A resurgence of Covid-19 could see construction projects delayed again. Should this happen, Somero’s status as a small-cap stock could prove a double-whammy. After all, the share prices of minnows can be very volatile in times of trouble. 

Nevertheless, I’m very encouraged by today’s news. As long as I can sit on my hands through inevitable setbacks, I continue to think this company will generate a fine return for my portfolio.

The post This small-cap stock is exploding today. Here’s why appeared first on The Twelfth Magpie.

More reading

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• How much is needed in an ISA to unlock £1,220 of passive income a year?
• Forget meal deals! Here’s how £8 a day could be worth £357,000
• Up 132% and surging, how is this FTSE 250 share STILL so cheap?

Paul Summers owns shares in Somero Enterprises, Inc. The Motley Fool UK has recommended Somero Enterprises, Inc. 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.

Return to form

At the end of last month, I said I’d be prepared to snap up FTSE 100 equipment provider Ashtead (LSE: AHT) based on my belief that there wouldn’t be any nasty surprises in today’s Q4 trading update. Positively, this has proven to be the correct call — the share price is up almost 3.5% as I type, on some very attractive numbers.

Revenue jumped 23% to £1.27bn in the final three months of Ashtead’s financial year as the company returned to growth. Understandably, the vast majority of this came from rental revenue. For FY21 as a whole, a 3% rise was logged at constant exchange rates (£5.03bn).

All told, Ashtead reported a pre-tax profit of £220m for Q4. That’s a stonking 158% jump compared to the same period in 2020. Nevertheless, a final figure of £936m for the entire year was 1% down due to the impact of Covid-19. 

Other highlights from today’s statement include the 75% jump in free cash flow to record levels (£1.38bn) helping to reduce leverage from 1.9 times to 1.4 times. Although most definitely not a high-yielding stock, the 3.7% increase to the total dividend was also indicative of a company recovering well.

So, would I buy?

Actually, yes I would. In addition to already-excellent operating margins and an international presence, Ashtead begins its new financial year “with clear momentum”, according to CEO Brendan Horgan. With leaders including President Joe Biden intending to spend big on infrastructure, this doesn’t sound like hyperbole. In fact, I think Ashtead is, quite literally, one of the best picks and shovels plays around.

Of course, there’s no sure thing in investing. A rise in the number of infections in Ashtead’s key markets may cause delays to projects, as might a shortage of materials. One also wonders if the company’s valuation — 28 times forecast earnings before the market opened — might prove too rich for some. 

Naturally, Ashtead isn’t the only option. Another of the best British stocks to buy in this sector, in my opinion, can be found lower down the market.

Growing flat-out

I’ve been bullish on laser-guided equipment manufacturer Somero Enterprises (LSE: SOM) for ages now. Some of this is probably down to old-fashioned bias (I hold the stock). However, recent stronger-than-expected trading in the US provides some substance. Assuming the company reports more good news in today’s annual general meeting, previous guidance could be exceeded again. 

Somero products ensure concrete is perfectly level. This may sound dull, but it’s essential for buildings like warehouses. And thanks to the explosion of online shopping following multiple lockdowns, those warehouses will be in even greater demand from retailers going forward.

Again, there are risks. Like Ashtead, Somero could be impacted by a slowdown in projects. Its minnow status also means the latter’s share price could prove more volatile than its FTSE 100 peer.  

Then again, on 17 times forecast earnings, Somero is considerably cheaper. It also generates far higher returns on capital (ROCE), has net cash on its balance sheet, and frequently showers its investors with cash. As such, I’d have no issue buying more today.

The post Top British stocks to buy for the infrastructure boom appeared first on The Twelfth Magpie.

More reading

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• How much is needed in an ISA to unlock £1,220 of passive income a year?
• Forget meal deals! Here’s how £8 a day could be worth £357,000
• Up 132% and surging, how is this FTSE 250 share STILL so cheap?

Paul Summers owns shares in Somero Enterprises. The Motley Fool UK has recommended Somero Enterprises, Inc. 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.

What happens next?

Here’s the bad news. Whether markets continue their downward descent in March is pretty much impossible to say. There are simply too many variables involved.

This being the case, it’s vital to separate signal from noise and only use the former to our advantage. In other words, investors need only concentrate on what they know or can control.

What we do know is that markets have always recovered over time… it’s individual companies that don’t. This being the case, it’s surely far more productive to look for high-quality businesses to buy on temporary weakness than it is to fret over whether global markets rise or fall on Monday.  

What do the best UK shares look like?

It’s subjective, of course. Nevertheless, I look to separate the wheat from the chaff using the following checklist. I want companies I invest in to:

• Solve a problem (if it doesn’t, why would anyone buy what it sells?)
• Be profitable (companies actually making money will always be more resilient than those dependent on hype)
• Offer multiple products (one-product companies are risky if fashion/demand changes)
• Generate repeat business (thus allowing me to be more confident on earnings)
• Have low/no debt (allowing a business to survive an inevitable crisis or two)
• Have great returns on capital (it makes lots of money from the cash it invests in itself)

Although there’s no such thing as a perfect company, many of my personal holdings tick many of these boxes. This explains why I’m invested in drinks firm AG Barr, laser-equipment supplier Somero Enterprises, kettle safety firm Strix and comparison website Moneysupermarket.com.  

Slow and steady

Buying even the best UK shares at a time when markets are falling takes guts. This fact is obvious when all is well but it can be hard to remember when the chips are down. 

I’m as susceptible to fear and greed as anyone else. In an effort to counter this, I think the most appropriate response is to adopt a ‘slow and steady’ approach. In practice, this means investing my money gradually. I may not be able to time my purchases perfectly but I’ve never met someone who can. The danger of trying is that the recovery happens before putting any capital to work. Ultimately, I may end up paying more than I wanted to. 

A slow and steady approach isn’t perfect. In theory, the more times I buy, the more commission I will incur. This is a problem since costs can have a huge impact on a portfolio’s performance over time, regardless of how good the actual investments are. One way I work around this is to take advantage of ‘regular investing’ plans that buy on the same date each month, vastly reducing what I pay.

Ignoring the noise, finding the best  UK shares to buy and keeping costs low is no guarantee of success, but it’s how I’m handling this latest market crash. 

The post Why I think NOW might be a great time to buy the best UK shares appeared first on The Twelfth Magpie.

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• With a 6.9% yield, is this one of the best FTSE 250 stocks for passive income?

Paul Summers owns shares of AG Barr, Moneysupermarket.com, Somero Enterprises, Inc. and Strix Group. The Motley Fool UK has recommended AG Barr, Moneysupermarket.com, and Somero Enterprises, Inc. 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.

Momentum share for a stock market rally

Harry Potter publisher Bloomsbury (LSE: BMY) enjoyed a magical 2020 thanks to more of us picking up a book or 10 during lockdowns. Back in October, the firm revealed a 10% rise in revenue (to £78.3m) and 131% jump in pre-tax profit (to £3m) over the six months to the end of August. Since we’re now into our third national lockdown, I can see this performance lasting a while longer.

Bloomsbury’s financial year ends next month. However, it probably won’t be until May that the company reveals how it’s performed over the last few months. That said, this does allow me time to take a position before the news is announced. 

Of course, whether the company can sustain recent momentum once the stock market rally has run its course isn’t a given. But I’m encouraged by it having plenty of cash on its balance sheet and reinstating dividends.

Rocketing revenue

With its share price soaring in recent months, my decision to buy a stake in laser-guided equipment manufacturer Somero Enterprises (LSE: SOM) in 2020 was one of my better calls.

Somero expects to post revenue of roughly $88m for the full year thanks to excellent trading in North America. This is far more than the $80m analysts were predicting. Adjusted earnings (EBITDA) of about $26m will also be “significantly ahead” of the $21m previously expected.

I can see Somero carrying this form into 2021, even if further planned investment in staff will temporarily impact profits. Demand for its products in the US looks likely to be sustained based on feedback the company has received. A revival of business in Europe and other markets once Covid-19 is conquered is also possible.

Factor-in a special dividend from cash-rich Somero and a forecast P/E of 14 for FY21 and it looks attractive to me in a stock market rally.

Looking good

Bath-based eyewear maker Inspecs (LSE: SPEC) is another small-cap stock showing positive momentum.

It wasn’t always this way. The shares fell 25% not long after their debut on the market last February. After recovering over the summer, they fell again in September and October, highlighting the volatility of small-cap shares that investors need to be aware of.

More recently, the performance has been much better. The shares have almost doubled in value since November. That’s quite a result considering we’ve heard very little from Inspecs over this period. No matter. I think the best stocks for me to own are often the ones not making headlines.

On 28 times forecast FY21 earnings, Inspecs looks expensive. But I think the PEG (price-to-earnings ratio/earnings growth) ratio of 1.6 is worth paying attention to. This implies the shares may actually be trading at a fair-rather-than-excessive valuation given the company’s potential. Add in its global reach and non-cyclical market (those who need glasses get glasses) and I think the £350m cap becomes an increasingly enticing investment proposition.

The post With £3,000 to invest in the stock market rally, I think these UK small-cap shares will keep rising in 2021 appeared first on The Twelfth Magpie.

More reading

• The £15bn defence splurge that could send UK shares soaring in July
• Up 446% in 12 months! What’s next for the Ceres Power share price?
• How much is needed in an ISA to unlock £1,220 of passive income a year?
• Forget meal deals! Here’s how £8 a day could be worth £357,000
• Up 132% and surging, how is this FTSE 250 share STILL so cheap?

Paul Summers owns shares of Somero Enterprises, Inc. The Motley Fool UK has recommended Bloomsbury Publishing and Somero Enterprises, Inc. 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 think there could be more to come.

Why is Somero soaring?

There are a few reasons. First, Somero made $35.3m in revenue in the six months to the end of June. While this may be lower than the $39m made over the same period in 2019, this is actually far better than previously expected.

Investors may be particularly heartened by news that three new products released by Somero over the first half of 2020 (including the SkyScreed 36) collectively generated $1.6m in revenue for the company. 

Pre-tax profit was 29% lower ($7.5m), but this isn’t too bad considering the disruption caused by coronavirus. 

Dividend delight!

The second bit of good news from today’s update is the resumption of dividend payments. Since no management team would be brave enough to restart these unless they had confidence in the business, such a move can only be interpreted as a good thing by holders.

An interim dividend of $0.04 per share was declared. This may be 30% down on the cash distributed last year, but I think this is prudent given the uncertain outlook.

In addition to this, Somero confirmed that it would also pay out the deferred FY19 dividend of $0.207 per share. A share buyback programme will also be kickstarted. 

According to CEO Jack Cooney, the coronavirus pandemic “has served as an excellent stress test for the business” and Somero will become a better company as a result. The company also stated that the growth in e-commerce due to Covid-19 restrictions would likely drive demand for new warehouses — exactly what its concrete-levelling products are made for!

In contrast to other businesses, Somero was also able to give some guidance on the full year. Revenue should now come in around $75m. Adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) will hit roughly $19m.

Still a buy

Aside from all this news, my chief reason for remaining bullish on the shares rests on Somero’s valuation. At just eight times forecast FY20 earnings before markets opened, Somero looks a steal. The investment case becomes even stronger when its stonking operating margins and returns on capital employed are factored in.

At a time when many companies are struggling to stay afloat, Somero’s balance sheet also looks in great shape. It had net cash of $28.9m at the end of June. This financial buffer should mean the company can withstand any further pandemic-related disruption.

And then there are the dividends. If we assume a 30% reduction to the $0.267 per share payout last year, we arrive at $0.187 per share. After today’s price rise, that gives a still-brilliant forecast yield of 5.4%!

Bottom line

Cyclical small-cap stocks won’t be to every investor’s taste. For those willing to buy and hold (and accept a bit of volatility on the way), however, I think Somero could be a great addition to a diversified portfolio. 

Growth, value, and income: it ticks all the boxes.

The post Somero Enterprises has rocketed 25% today! I’d keep buying this bargain UK share appeared first on The Twelfth Magpie.

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• Up 446% in 12 months! What’s next for the Ceres Power share price?
• How much is needed in an ISA to unlock £1,220 of passive income a year?
• Forget meal deals! Here’s how £8 a day could be worth £357,000
• Up 132% and surging, how is this FTSE 250 share STILL so cheap?

Paul Summers owns shares of Somero Enterprises, Inc. The Motley Fool UK has recommended Somero Enterprises, Inc. 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.

ISA buy

My first ISA purchase has been a small stake in small-cap ceramic tableware manufacturer and distributor Churchill China (LSE: CHH).

At first sight, this might seem a very odd move. After all, the company’s biggest customers are pubs, restaurants and hotels — the very places that have been closed for months. And yes, even if the government allows some of these sites to open in late June, trading could be very tough for quite a while.

Nevertheless, I still think quite a lot of this is priced in. The share price is, after all, still down 40% from the highs hit at the start of the year. If you believe current estimates, this leaves Churchill trading on 13 times forecast earnings. That’s cheap relative to its five-year average of a little under 19.

Second, this firm has shown all the hallmarks of a quality business, namely fat margins and decent (and rising) returns on capital employed. It’s also got a sound balance sheet with net cash of £15.6m in April. 

Third, a large proportion of the company is still owned by the Roper family. That’s something I really like to see because it implies their interests will always be aligned with those of your typical retail investor. Another tick in the box.

Let’s be clear on this: Churchill’s 2020 numbers will likely be very poor and the shares could fall again when it next reports to the market.

As a medium-to-long-term recovery play, however, I’m cautiously optimistic that the margin of safety is now sufficient to begin investing.

Sometimes, you just have to press the buy button.  

Cost-cutting

A second market minnow I’ve been buying for my ISA in June has been laser-guided equipment manufacturer Somero Enterprises (LSE: SOM). Fortunately, this purchase went through before the recent trading update that saw the shares rise almost 4.3% on the day. 

In response to uncertainty over how long the coronavirus will be with us and what impact it will have on business, Somero announced another range of cost-cutting measures last week, designed to save around $5m. Roughly 20% of its staff have been furloughed and all bonus-related pay has been cancelled. Capital expenditure has also been reduced further, although product development is still ongoing. 

That’s not to say the small-cap is in financial distress. Management believes the company will have $24m in net cash at the end of this month. And while current revenues are already 25% below the $90m originally targeted by analysts in 2020, they reckon it will still be cash generative if they tumble another 20% from here.

Naturally, no one knows what happens next with Covid-19. Like Churchill, there’s always a chance the stock could fall in value. With its focus on construction projects, Somero is also undeniably cyclical, which explains why the market has long been reluctant to slap a high price on its shares. 

Even so, I can’t help but think that a company like this trading on less than eight times earnings already offers great value. Time will tell. 

The post 2 bargain small-cap stocks I’ve been buying for my ISA appeared first on The Twelfth Magpie.

More reading

• The £15bn defence splurge that could send UK shares soaring in July
• Up 446% in 12 months! What’s next for the Ceres Power share price?
• How much is needed in an ISA to unlock £1,220 of passive income a year?
• Forget meal deals! Here’s how £8 a day could be worth £357,000
• Up 132% and surging, how is this FTSE 250 share STILL so cheap?

Paul Summers owns shares of Churchill China and Somero Enterprises, Inc. The Motley Fool UK has recommended Churchill China and Somero Enterprises, Inc. 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.