Why this Neil Woodford stock could help you retire early

Roland Head raves about a recent Neil Woodford pick and considers an alternative choice.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Fund manager Neil Woodford has backed a number of new stock market flotations in recent years.

Today, I want to take a closer look at one of these companies, together with another small-cap growth stock that’s just released an interesting set of results.

A top Woodford pick?

Woodford’s heavy exposure to the UK housing market is definitely a bold move, as my colleague Harvey Jones explains here.

But Woodford Funds’ 9.2% stake in Strix Group (LSE: KETL) seems far less risky to me. Indeed, I believe this stock could be a star performer over the years ahead. Strix makes temperature controls for kettles. These components are subject to tough regulatory testing in most western markets, because of the safety risks if they malfunction.

New competitors find it hard to break into this market because Strix’s large market share and protective patents form a barrier to entry.

A long-term buy

Last year’s accounts show an operating margin of 29% on sales of £91.3m. Such a high profit margin suggests to me that the firm’s components don’t face too much price competition.

Management is now looking for new growth markets. In my view, the most exciting of these so far is a recent deal with a major US consumer goods company. This unnamed firm plans to use Strix’s technology in a new range of single-serve coffee machines.

I’m sure you don’t need me to tell you that if Strix can achieve a decent market share in coffee machines, its sales could rise significantly above current levels.

Analysts expect the group’s earnings to rise by around 4% this year, to 13.7p per share. This puts the stock on a forecast P/E of 11.8, with an expected dividend yield of 4.3%. In my view, this could be a good long-term dividend-growth buy.

A turnaround opportunity?

One recent flotation that has disappointed investors is LED lighting group Luceco (LSE: LUCE). Shares in this small-cap edged lower this morning after the firm reported a half-year operating loss of £3.1m, on sales of £75.1m.

The bad news wasn’t a complete surprise. The firm had warned in July that rising costs, destocking, and weak UK consumer confidence would hit profits. The question for shareholders is what might come next?

According to today’s report, the group expects to return to profit during the second half of the year. Chief executive John Hornby says that Luceco’s third-quarter UK retail order book is 30% higher than it was at the start of Q2.

The firm is also benefiting from a fall in the price of copper and agreements for higher selling prices. Both changes should help to restore the group’s profit margins.

Buy, sell or hold?

I can see the turnaround potential here. But I do have some concerns.

The first is that LED lighting seems to be a very competitive business. Larger peer Dialight has also seen profit margins fall in recent years. I don’t know enough about this sector to know which companies, if any, have a sustainable advantage over cheaper rivals.

My second concern is that Luceco’s net debt has now risen to £41.4m. That seems high to me for a company that’s only expected to report a net profit of about £10m this year.

The shares’ forecast P/E of 10 seems about right to me, in these circumstances. I wouldn’t buy anymore just yet.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

More on Investing Articles

Investing Articles

Surely, the Rolls-Royce share price can’t go any higher in 2025?

The Rolls-Royce share price was the best performer on the FTSE 100 in 2023 and so far in 2024. Dr…

Read more »

A young woman sitting on a couch looking at a book in a quiet library space.
Investing Articles

Here’s how an investor could start buying shares with £100 in January

Our writer explains some of the things he thinks investors on a limited budget should consider before they start buying…

Read more »

Investing Articles

Forget FTSE 100 airlines! I think shares in this company offer better value to consider

Stephen Wright thinks value investors looking for shares to buy should include aircraft leasing company Aercap. But is now the…

Read more »

Investing Articles

Are Rolls-Royce shares undervalued heading into 2025?

As the new year approaches, Rolls-Royce shares are the top holding of a US fund recommended by Warren Buffett. But…

Read more »

Investing Articles

£20k in a high-interest savings account? It could be earning more passive income in stocks

Millions of us want a passive income, but a high-interest savings account might not be the best way to do…

Read more »

Investing Articles

3 tried and tested ways to earn passive income in 2025

Our writer examines the latest market trends and economic forecasts to uncover three great ways to earn passive income in…

Read more »

Investing Articles

Here’s what £10k invested in the FTSE 100 at the start of 2024 would be worth today

Last week's dip gives the wrong impression of the FTSE 100, which has had a pretty solid year once dividends…

Read more »

Investing Articles

UK REITs: a once-in-a-decade passive income opportunity?

As dividend yields hit 10-year highs, Stephen Wright thinks real estate investment trusts could be a great place to consider…

Read more »