UK Edition
Markets currently seem to prefer shares in the companies whose business models, financial performance and share price suffered the most in 2020, as they may show the fastest growth in 2021 (not least because they are coming from a very low base) – in crude terms, “value” (or cyclical growth) is doing better than “growth” (secular progress).
A return to some degree of economic normality next year would surely help Grafton, the builders’ merchant, on whose shares, remarkably given the circumstances, we now have a paper profit following our initial analysis 18 months ago.
The FTSE 250 company is also getting a lift from the rash of home improvement work carried out during lockdowns, often funded by cash earmarked for holidays, at least among those who have been fortunate enough to keep their jobs.
This is one reason why the consensus forecast for 2020’s pre-tax profits has surged by 60pc since our last look at the stock in June and the dividend forecast has doubled to 14.2p a share. Analysts expect a return to profit growth in 2021 for good measure, although earnings are still not expected to return to their pre-pandemic peak.
A cyclical post-pandemic upturn should help on that front but Grafton offers a strong internal dynamic too. Its Selco brand continues to take market share, investment in the IT system at Buildbase should bring long-term benefits and the company continues to make bolt-on acquisitions, the latest of which is the £44m swoop for Stairbox, an industry-leading manufacturer and distributor of bespoke wooden staircases, announced last week.
Momentum appears to be building nicely at Grafton. Hold.
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Questor says: hold
Ticker: GFTU
Share price at close: 843.5p
Update: Pressure Technologies
One victim of the collapse in oil prices has been Sheffield’s Pressure Technologies and our analysis of the tiny firm, worth just £14.3m, two years ago has yet to bring us any joy, seasonal or otherwise.
But last week’s share sale to raise £7.5m further bolsters the balance sheet, where debt has already come down, and supports a £3m investment in the group’s push into the hydrogen energy storage market.
This looks a shrewd diversification for the precision manufacturer as oil remains in the doldrums, the new market will be well served by its skills in safety and pressure containment and, as noted in our analysis of SSE two week ago, the Government is one of many looking to throw large amounts of investment at renewable sources of energy.
Very small stocks are not for everyone and the risks remain high, as evidenced by a further profit warning early last month, thanks to the effects of the pandemic and the deferral of a defence contract. Moreover, the recent profits record is chequered and the last dividend payment dates back to 2016.
But the market value is barely half annual sales, the company’s technology is strong and its finances are on a sound footing so there remains scope for a turnaround here, especially if the hydrogen drive pays off. Pressure Technologies remains a high-risk play but it could yet provide high-octane returns.
Questor says: hold
Ticker: PRES
Share price at close: 77p
Update: OSB Group
After Walker Greenbank’s change to Sanderson Group, reported here last week, another Questor recommendation has a new name: OneSavings Bank is now OSB Group.
Buoyed by hopes for an economic upturn and a promising third-quarter update, which hinted at a possible return to the dividend list and suggested no further marked increase in bad loans, shares in the specialist mortgage lender are on a good run. Even so they still look cheap on barely 10 times bottom-of-the-cycle earnings.
Questor says: hold
Ticker: OSB
Share price at close: 399.8p
Russ Mould is investment director at AJ Bell, the stockbroker
Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 6am.