Taking a contrarian view as an investor certainly isn’t easy. There are occasions, however, when doing so pays off handsomely. A great example of this is FTSE 250 retailer Pets At Home (LSE: PETS).
A little over a year ago, the company was in the doghouse as it fought against weak sales and rising costs. Since then, however, the turnaround under CEO Peter Pritchard has been nothing short of superb. From a low of around 115p in November 2018, shares in the Wilmslow-based business have appreciated a touch over 150%.
Today’s trading update suggests there could be more upside ahead with the company reporting a “record-breaking performance” in its Retail division in Q3. Revenue here rose 7.2% with omnichannel sales (which includes orders placed online) rocketing 23.4%.
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Highlighting just how lucrative anything related to our furry (and not so furry) companions can be, a 14.4% rise in revenue at its veterinary services was also logged “with mature practices growing ahead of the market“.
All told, total revenue growth of 7.9% to just under £256m was recorded for the 12-week period from 11 October to 2 January. Based on this performance, Pets made no changes to the financial guidance it issued back in November, stating that expectations for underlying pre-tax profit remained “in line with current market consensus“.
Clearly not the bargain they once were, the shares were trading on 20 times earnings before the markets opened this morning. While I wouldn’t necessarily fight to build a position at the current price, the resilient nature of the industry leads me to think that those already holding shouldn’t dash to bank profits either. A projected total dividend of 7.53p per share in the current year gives a yield of 2.6%, covered almost twice by profits.
Back on track
Another stock that’s recovered well in recent times has been laser-guided equipment manufacturer Somero Enterprises (LSE: SOM). Available for 187p a pop back in October, the shares now trade a little over 50% higher following today’s reassuring update on trading.
Thanks in part to better weather in the US allowing previously delayed building projects to commence, Somero announced that it had seen “strong, profitable trading” in the final quarter of its financial year. As a result, management now predicts annual revenue will come in “modestly ahead of the top end of guidance” provided back in July 2019.
Looking ahead, it said that it expects 2020 will be “a profitable year” for the company. That said, revenues and earnings are likely to be similar to those seen in 2019 due to increased investment in its SkyScreed product. Issues in non-US markets already impacted by economic uncertainty are also likely to “slightly temper” growth expectations, the small-cap said.
Somero’s shares were changing hands for a little less than 10 times forecast FY20 earnings before markets opened. Even after taking today’s 10% rise into account, this kind of valuation still looks cheap for a firm with operating profit margins and returns on capital of around 30% and 50% respectively,
The bulletproof balance sheet is also worth mentioning. Net cash of $23m at the end of 2019 — far better than the $18m predicted last July — should ensure that Somero is able to stick with its generous dividend policy going forward.
The cyclical nature of the business may still be enough to put some investors off but, like Pets, I see no reason for relatively new holders to bag profits just yet.
