Promote these three growing companies with the right tools
- These three companies seek to provide growth at a reasonable price
- Measures other than price / earnings ratios should also be explored.
To determine if a stock is cheap or expensive, it’s important to look at the right metric. Although the PE ratio is the dominant guide in valuation, it can be misleading. In some cases, net asset value (NAV) is the primary measure, for other companies with a large gap between profitability and cash flow, it is better to consider the ratios of earnings before interest, taxes, depreciation and amortization (Ebitda). PE ratios can be flattered by short-term and / or totally external phenomena which degrade the quality of earnings.
Deputy Evans (MEP) – this Indonesian-based palm oil producer is riding a mini cycle of raw materials in cooking oils where shortages caused by Covid have caused a price spike that could last until 2025. Oil production from palm has had a bad reputation, but the industry is evolving in a sustainable manner Producers such as MPE are now achieving high ESG scores. Although stocks may seem relatively cheap (14x PE), the rise in earnings is based on windfall earnings and this lowers the quality of earnings, but four years of increased dividends from those higher earnings is attractive.
JD Sports (JD.) – UK’s leading sports retailer has an impressive trading and share price history with a 30-fold increase in the share price over 10 years and a 10-fold increase in revenues. However, larger scale is starting to dampen growth and after a drastic change in EPS this year, growth is expected to drop to just 6% per year through 2024. Although a PE close to 20x looks expensive, stocks are better valued using EV / Ebitda. Based on that, JD looks cheap with less than 7x, but Omicron still has the potential to spoil the party for retailers and stocks have been downgraded accordingly. Cheaper buying opportunities may present themselves.
Greencoat UK Wind (UKW) – a specialized investment trust focused on the assets of UK wind farms where, like most non-equity trusts, it is more difficult for investors to understand movements in the very large net asset value. Higher electricity prices are positive, as are higher general inflation, but with large debt rising interest rates are a problem, as are higher discount rates to fix the present value. net (NPV) of wind farm assets. Stocks may look cheap on a PE of 7x, but earnings aren’t the driver here, it’s NAV growth and while it seems likely it is far from certain: a reliable return above 5% has some appeal, however. Another potential issue here is a low, perhaps unexpected ESG score for a green energy store.