The still-short, still-dark days of February can be a gloomy time of the year, particularly if you’re not feeling the love in the air. Worse news, this February is a leap year, so that makes a depressing month slightly longer than normal.
But as February begins, I’m feeling affection for packaging manufacturer Mondi (LSE:MNDI) and international equipment rental company Ashtead Group (LSE:AHT).
Price-to-earnings ratio
A company’s price-to-earnings (P/E) ratio is a financial metric used to gauge its value. A P/E of less than 10 could be bargain territory, while over 15 is getting expensive. However, too low a P/E and it usually reflects a high risk or problems with the business.
A lot of the stocks I like the look of already have positive sentiment priced in, and as such, have a P/E that’s undesirably high. This includes companies such as drinks giant Diageo, software group Aveva and food packaging business Hilton Food Group.
Having a high P/E doesn’t make them a bad buy, of course. It’s just that they’re less likely to see rapid growth and could be more vulnerable to a share price fall. In theory, a high P/E should indicate higher returns, but it can also mean an overvalued stock.
Future stars?
So, let’s look at some companies with a reasonable P/E and a desirable outlook. Packaging company Mondi has a P/E under 10. I wrote about it last month and still like the look of its future prospects.
The increase in online shopping, and general consumerism, has increased the need for both product and postal packaging. Mondi, therefore, manufactures a product range with strong demand.
Being a FTSE 100 company, it’s well established with a global base and a market capitalisation of £7bn. Its forward dividend yield is 4.5% and earnings per share are £1.62.
In January, it confirmed it has successfully maintained an A- leadership rating by CDP for Climate Change. This is not just a positive rating, but a vital one in today’s battle for a sustainable future. As more and more investors look to ESG investing, Mondi should be a good contender for an ethical investor’s watch list.
Leaps and bounds
Ashtead Group is the second-largest equipment rental business in North America and the largest in the UK. The US rental market is five times bigger than its UK counterpart.
Its business model is to buy equipment from leading manufacturers then rent it out to a wide selection of customers. Ashtead keeps its rental equipment up to date, of course, and once its rental period has run its course, it sells the equipment on the second-hand market.
It has a P/E of 14 and a market cap of £11.25bn, while earnings per share are £1.76. And its forward dividend yield is low at only 1.6%, but it’s covered a hefty four times by earnings-per-share
Refinitiv recently confirmed it to be the best performing FTSE 350 stock of the past decade. An impressive accolade to say the least. During this time, it attained an astounding compound annual growth rate of nearly 43%.
Commitment to its share buyback programme has benefited shareholders to the tune of £500m this year.
I consider both these stocks desirable Buys this February for long-term investors.