I’ve spent most of the last year researching and buying FTSE 100 dividend payers rather than growth stocks. While I was distracted, two hidden gems have flown to the stars. I’ve only just woken up to what I’m missing.
The first is equipment rental firm Ashtead Group (LSE: AHT). It’s been on my watchlist for ages, but I’ve never paid it the attention it deserves, and I’m annoyed with myself.
Ashtead generates most of its revenues in the US, trading under the name Sunbelt Rentals. It rents a full range of construction and industrial equipment to companies and tends to do well when the US is booming.
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FTSE 100 shares going places
Last year I decided the slowing US economy would hit demand, except it didn’t slow and nor has the Ashtead share price. It’s up a thumping 27.62% over one year, and 180.47% over five.
As a rule, I’m wary of momentum stocks. My fear is that the wheels will come off the moment I click the ‘buy’ button. Yet I can’t keep hanging back, given what I’ve missed out on.
In my defence, I’m not the only one who is cautious. On 5 March, the board warned that full-year group revenues will expand at the low end of its 11% to 13% target range. That’s largely due to a drop in hurricane, wildfire and winter storms, which hit demand for emergency equipment.
However, CEO Brendan Horgan insisted the outlook remains “robust” as the US embarks on an “increasing number of mega projects”. Ashtead shares are a little pricier than I’ve got used to, trading at 18.68 times earnings, roughly double the average FTSE 100 valuation.
The yield is much lower than most of my recent purchases, at 1.39%. If the US economy finally slows, that shares could quickly give up some of their recent gains. I’d like to wait for a dip before buying them, but timing the market like that is a mug’s game. Instead, I’ll start building a position, the moment I have some cash.
Now a confession. Distribution group Diploma (LSE: DPLM) has completely slipped my attention. I’ve never written about it, never considered buying it. It’s only come to my attention because the share price is up 36% over the last year, and 130% over five years. What have I been missing?
This is another smasher
Diploma describes itself as a “dynamic, value-added distribution group”. This involves selling critical components to businesses, such as interconnections, speciality fasteners, adhesives, wires, cables, seals, surgery supplies, and so on.
Like Ashtead, it has a big presence in North America, as well as the UK, Europe and Australia. It’s growing rapidly through acquisitions. They accounted for 8% of reported 10% revenue growth in the three months to 31 December.
Like Ashtead, Diploma relies on a robust, growing economy. Yet the board predicts solid full-year organic growth of 5%, with free cash flow conversion at around 90%.
It’s pricier than Ashtead trading at 28.36 time earnings, while yielding 1.58%. Margins look solid at 18.9%, but are expected to stay flat this year. Acquisition-led growth is not without risks, as bolt-ons can take time to pay off, or can fail to pay off. I need to do more research, but for now, Diploma goes straight on my watchlist too.
