Smaller companies sometimes take longer than large firms to bounce back from a stock market crash. This isn’t necessarily because they’re worse investments. It’s just that smaller stocks don’t get as much coverage or backing from City types.
For private investors like us, buying cheap shares in unloved smaller companies can be a great way to lock in future gains. And by investing in a tax-free Stocks and Shares ISA, you can protect your gains from the tax man.
The company I’m going to look at today is unloved at the moment, but I believe it’s a good business that’ll bounce back strongly. I reckon now could be the right time to buy, before the wider market starts to price in a recovery.
This share price is on the floor
One casualty of the stock market crash is flooring distributor Headlam Group (LSE: HEAD). Headlam’s share price has fallen by around 45% so far this year, but I think the worst is probably over.
Headlam says it’s “Europe’s leading floorcoverings distributor.” The group’s business model is to supply shops and flooring contractors with a full range of products, through localised distribution operations. Sales last year totalled £719m.
Today’s half-year results suggest the business is well-positioned to bounce back from Covid-related shutdowns. Although sales were 30% lower than during the same period in 2019, pricing was said to be stable and the company is now seeing “pleasing” trading, with July ahead of last year.
Strong finances
Headlam suffered an underlying pre-tax loss of £1.2m for the half year, but analysts expect the group to return to profitability for the full year. The group’s strong finances should make this easier. Net debt hit £22.4m at the end of June, but had fallen to £7.3m by the end of July as trading resumed.
In the short term, the outlook remains uncertain. Regional lockdown restrictions this winter could hit sales again. But the company has worked through possible scenarios and says even if we see a “persistent downturn” over the next 18 months, the company’s existing banking facilities would provide enough headroom.
I’ve followed Headlam for a while and have gained a good impression of this business. In my view, it’s well run, profitable, and enjoys good economies of scale.
A stock market crash is the right time to buy!
It’s a bit scary buying cyclical stocks immediately after a stock market crash, with a recession on the horizon. But as Warren Buffett once said, to make money in the stock market you need to “be greedy when others are fearful.”
If you’re happy to buy these shares and keep them for 3-5 years, I’m confident you’ll make money.
City analysts expect Headlam’s earnings to recover strongly next year. The latest consensus forecasts price the stock at just 9.5 times 2021 earnings, with a possible 6% dividend yield.
I think the worst is probably over for this business. And even if we do see further problems, I’m confident Headlam should be able to ride out the storm.
In my view, this could be a great ISA buy.