Wound-care products

As a quick reminder, Advanced designs, develops, and manufactures advanced wound-care products for the healthcare market. It has a series of branded and non-branded products. Some products are designed for general use, while it also develops speciality products for surgical use too.

So what’s happening with the Advanced share price currently? Well, as I write, the shares are trading for 280p. At this time last year, the stock was trading for 284p, which is a 1% decline over a 12-month period. It is worth noting that the healthcare stock has pulled back 17% since the turn of the year, from 338p to current levels.

To buy or not to buy?

So what are the pros and cons of buying Advanced shares?

FOR: I like the look of Advanced’s business model and growth prospects. With its branded and non-branded revenue streams, it is able to make money from both divisions. Furthermore, it has a huge profile and presence and sells its products in over 80 countries. Elective surgeries took a major hit during the pandemic period but things have returned to normal. Advanced’s position as a leading wound-care product provider should be able to assist growth, boost performance, and in turn, any returns I would hope to make as an investor.

AGAINST: Current macroeconomic headwinds pose real risks for Advanced’s growth prospects and performance. Soaring inflation, the rising cost of raw materials, as well as the global supply chain crisis could have a material impact on the healthcare stock. Profit margins could be squeezed by rising costs and operations and sales could be affected by supply chain problems. My belief is that these issues are shorter term, and I invest for the long term.

FOR: I am buoyed by Advanced’s performance track record. I do understand that past performance is not a guarantee of the future. Looking back, I can see it has recorded consistent revenue and profit in the past four years. Most tellingly, however, I note that its 2021 performance was higher than pre-pandemic levels. This supports my theory that elective surgeries have returned to normal and Advanced’s growth prospects ahead look attractive.

AGAINST: One concern is the current valuation of Advanced shares. On a price-to-earnings ratio of just over 30, the shares look a tad expensive. Future growth may already be priced in. Furthermore, any bad news could make the share price tumble. I will keep a keen eye on developments.

A healthcare stock I would buy

Weighing up the pros and cons, the positives outweigh the negatives for me. For that reason, I would be willing to add Advanced Medical Solutions shares to my holdings. The firm’s profile, presence, and growth prospects look attractive to me. As a bonus, it pays a dividend too, which would likely boost my passive income stream.

Here, I’m going to highlight two UK stocks trading under £5 that I’d be comfortable buying today. Both of these companies have momentum right now, and look poised to benefit from dominant long-term structural trends. 

A UK electric vehicle stock

The first stock I want to highlight is Volex (LSE: VLX). It’s an under-the-radar UK manufacturing company that specialises in products that provide power and connectivity for both everyday items and complex machinery.

Its products, which include power cords and cables, are used in a number of high-growth markets including the electric vehicle (EV) and data centre industries.

Half-year results from Volex earlier this month showed the company is growing rapidly right now. For the 26 weeks to 3 October, revenue was up 45% year-on-year to $293m, while underlying operating profit was up 31% to $27.3m.

One highlight of the results was EV market sales, which were up 210% to $45m. Basic earnings per share came in at $0.11, up 8% year-on-year.

“With excellent long-term prospects from organic growth and acquisitions, we are confident in our strategy, our operating model and our ability to create further shareholder value,” said chairman Nat Rothschild.

However, the market was unimpressed with these H1 results, due to the fact that the company mentioned it’s investing for growth. This spooked investors and pushed the share price down.

And I see this pullback as a buying opportunity as the forward-looking P/E ratio is now in the low 20s. That’s an attractive valuation, in my view, given the growth here.

Of course, there are risks to consider. One is supply chain issues, which are impacting a lot of manufacturing companies right now. Another is competition from rivals.

Overall, however, I think this stock offers a nice risk/reward proposition right now.

A top stock under £5

Another UK stock under £5 I like the look of right now is Advanced Medical Solutions (LSE: AMS). It’s a leading developer and manufacturer of advanced wound care and surgical products. Its products, which are marketed under a range of brand names, are sold in nearly 80 countries worldwide.

Like many healthcare companies, AMS saw its revenues dip during Covid due to the fact that many elective medical procedures were cancelled. However, the company now appears to be making a strong recovery. Indeed, in its half-year results for the six months ended 30 June, the group posted revenue of £50.2m, up 28% year-on-year, and profit before tax jumped 133% year-on-year to £12.4m.

Looking ahead, I see a lot of growth potential here. In the short term, the company should benefit from  elective surgery backlogs that have built up globally over the last 18 months. Meanwhile, in the long run, it should benefit from the world’s ageing population, which is likely to drive demand for wound care products higher.

One risk here is the stock’s valuation. Currently, the forward-looking P/E ratio using next year’s earnings forecast (10.4p per share) is in the low 30s. This valuation doesn’t leave a huge margin of safety. If future growth is disappointing, the stock could take a hit.

But I’m comfortable with this valuation. That’s because I think this company can generate significant growth in the years ahead.

A cheap UK medical share

I think spending on some choice healthcare shares could be a good idea. Many medical companies have suffered a torrid time over the past year as the pandemic has shattered the number of elective surgical procedures being carried out.

However, I think the long-term outlook for the sector remains extremely bright. In particular, soaring healthcare spending in developing markets provides plenty of opportunities for businesses.

Advanced Medical Solutions Group (LSE: AMS) is a cheap UK share I’m expecting to thrive. This company manufactures a range of wound treatment products that help repair, manage and close up damaged and cut tissue during and after surgery.

Its highly-developed technologies have made it one of the largest operators on the planet. Pleasingly, AMS has plenty of capital with which to continue developing cutting-edge treatments too.

It had more than £61m worth of cash on the balance sheet as of June, thanks to rebounding end markets in the first half of 2021. I’d buy this share despite the possibility that a surge in Covid-19 cases could put an end to its recent rebound. Revenues here jumped 28% year-on-year in the first half.

A FTSE 100 growth and dividend share

The FTSE 100 is packed with top-quality, low-cost shares for me to buy as well. One that’s attracting me with its exceptional value today is banking colossus HSBC Holdings (LSE: HSBA). This blue-chip stock trades on an ultra-low forward price-to-earnings (P/E) ratio of 9.4 times. It also carries an index-beating 4.8% dividend yield.

I think HSBC’s a great buy because of its focus on fast-growing Asian markets. In the short term, this could prove problematic as the recovery from Covid-19 is tipped to be slower in emerging regions like this. But, over a longer-term time horizon, I think this could pay off handsomely.

Economic growth in Asia is tipped to remain much stronger than in developed countries in the post-pandemic environment. This, allied with the low penetration of banking in many of the places where HSBC operates, could help deliver some monumental returns.

Analysts at McKinsey Company think total banking revenue pools in the region will grow between 7% and 8% per year over the next five years.

Sure, HSBC faces intense competition from smaller, more agile digital-led challenger banks in Asia. However, the bank has one of the industry’s most trusted brands.That’s something I feel could give it an edge against these new kids on the block.

The business is also investing heavily in its own digital operations. I think this could also could help me make a lot of cash over the next 10 years.

The business is a developer and manufacturer of surgical and wound care products. These range from tissue adhesives to wound dressings sold under multiple globally recognised brands. With lockdowns keeping people at home, A&E visits have dropped by almost half. Furthermore, with hospitals overwhelmed by Covid-19 patients, many elective surgeries have been delayed by a similar rate.

Combined, this had led to a significant decline in product sales. But now that the vaccine rollout is underway, is the tide about to change? Is this pharma stock about to make a comeback in 2021? And should I consider adding it to my portfolio? 

A pioneer in wound care

AMS has been around since the early 1990s. It was initially a research and development firm. But skip forward a few decades and a couple acquisitions, and the pharma stock has become a leader within its market space.

The business can be broken up into two units. Unit one is called Surgical. It sells AMS branded products to medical centres – such as hospitals – directly or through third-party distributors. The second unit is called Woundcare. This division develops and supplies a wide range of products to its business partners, who subsequently use them to create their own branded products.

Both segments are responsible for generating a roughly even split of total revenue. However, the Surgical unit appears to be significantly more profitable, with an operating margin of 34% in 2019.

As previously stated, Covid-19 has had a major impact on this stock. While its manufacturing facilities remained in operation throughout 2020, general demand for the firm’s products fell sharply. As a result, forecast revenue for 2020 is expected to be around 20% lower than in 2019.

However, the catalyst behind this poor performance looks only temporary to me. And with Covid-19 slowly coming under control, I believe that demand can return and even grow in the latter part of 2021. But as always, there are plenty of challenges and risks ahead.

A fiercely competitive market

Wound care and surgical are highly competitive spaces. While regulators make it difficult for new entrants, the number of global competitors for the company continues to rise.

As such, the need to continually innovate and expand its intellectual property portfolio is exceptionally high. But this might begin straining the company’s financials.

Fortunately, there’s a large proportion of cash on the balance sheet that has proven vital to continue funding its R&D department throughout the pandemic. However, should the business make another acquisition, this cash balance may no longer be available to rely on if another similar event were to occur.

Is the pharma stock on my buy list?

AMS looks perfectly positioned for a rebound in my eyes. Assuming that demand returns to pre-Covid levels later this year, the current stock price seems relatively low. The fierce competition will continue to be an ever-present threat, but the potential reward might just outweigh the risk.

Therefore I think the stock could be a fantastic opportunity for value investors, and perhaps even my portfolio as well.

At the moment, with the Covid-19 pandemic still ongoing, and Brexit just around the corner, risks for small-cap stocks, in particular, are high. However, I am willing to accept the risks and have a long enough time horizon to ride out any rough patches. With that in mind, here are two UK small-cap stocks that I would consider buying for December 2020 and beyond.

A small-cap healthcare stock

Hospitals have performed fewer surgeries and procedures this year. For a surgical and advanced wound care small-cap stock like Advanced Medical Solutions (LSE: AMS), this is bad news. Half-year 2020 revenue and profit before tax both declined, by 19% and 62% year-on-year respectively. But things are already getting better in most of the markets the company serves. The recent vaccine developments are encouraging and could potentially end the pandemic sometime next year. Hospitals returning to normal working conditions is a boon for AMS’s sales and bottom line.

Recent developments include two product approvals in India, patents granted in the UK and US for an advanced dressing, and a CE mark being awarded for another. Just yesterday, AMS completed the £22m cash acquisition of a wound care and bio-diagnostics coating business, that was also a key supplier. 

These developments position AMS well for making the most of a recovery in surgical caseloads. Also, shopping for acquisitions and increasing R&D investment to £3.8m this year speaks volumes about AMS’s financial health and management confidence in the medium- and long-term prospects for this UK small-cap stock.

An AIM technology stock

Quartix Holdings (LSE: QTX) is one of Europe’s leading suppliers of subscription-based vehicle tracking systems, software, and services. In January 2020 the company picked up 555 new customers. Then, the Covid-19 pandemic knocked customer acquisition levels down to 200. However, 474 customers were added in September this year, meaning the impact was not as dramatic nor as long-lasting as once feared. All in all, across all markets served, the number of vehicles using Quartix’s products and services have increased so far this year. However, Quartix’s insurance telematics business, which relies heavily on newly insured drivers, slumped, but it does represent only 16% of total revenue.

I think UK small-cap stock Quartix has a lot going for it. Quartix’s customers have had the company’s tracking equipment installed on their vehicles and have learnt how to use its software. Switching to another product is expensive and time-consuming. This suggests customers will stick around. Those customers pay subscriptions for continuing use after installation. Recurring, predictable revenue is great for a growing company.

And Quartix does look good for continued growth. Its customers tend to be owners of fleets of cars and vans. Quartix gives them the ability to locate their vehicles 24/7, make scheduling of deliveries easier, check millage, and report driver locations to their customers. Quartix provides an essential service for customers looking to improve their fleet management. The increase in online delivery is just one trend that is increasing the need for fleet management.

But Advanced Medical Solutions (LSE: AMS) is down by 10% today as I write on the release of its half-year report. And that follows at least five years of rising revenue, earnings and shareholder dividends that powered a 110% increase in the share price over the period, even after deducting today’s fall.

A strong trading niche

The company describes itself as “world-leading” developer and manufacturer of “innovative and technologically advanced” products for the global advanced wound care, surgical and wound closure markets. In today’s world, that sounds to me like a great business to be in, but today’s report reveals to us something of a stall in the growth figures, although the directors believe the situation is temporary.

While constant currency revenue in the first six months of the year rose 1% compared to the equivalent period last year, adjusted diluted earnings per share slipped back by 3% and adjusted net cash from operations fell by 12%. Yet undeterred, the directors pushed up the interim dividend by 19%, suggesting their optimism about the immediate outlook for trading.

The hiatus in overall profit growth seems to have been caused by the company’s planned investment in research & development (R&D) and a previously flagged slowdown in US sales of the wound adhesive product Liquibrand, which fell by 27%. But chief executive Chris Meredith said in the report the firm expects US sales to recover next year. Meanwhile, sales of other products in the US and other geographies actually grew by 10% overall, suggesting that the firm’s general growth trajectory remains intact.

Temporary challenges

The company puts down its problems in the US to customer de-stocking, competitor activity and “delayed” product launches. I’m optimistic that these challenges will indeed prove to be temporary and today’s plunge in the share price will turn out to be a decent opportunity to buy some of the company’s shares at a discount.

But we need a discount if we can get it because the growth story here has not gone unnoticed by the investing community. Even at today’s share price close to 251p after the fall-back, the forward-looking earnings multiple for 2020 sits just above 22. That compares to City analysts’ expectations of an advance in earnings that year between 7% and 8%. Indeed, the valuation seems quite rich, but I see that as a mark of quality in this case.

Nonetheless, when valuations are high, we often see corrections in share prices like this on any slightly less-than-positive news, as today with AMS. Yet, in this case, the directors expressed their optimism about the firm’s medium- and long-term prospects, so I see the shares as attractive and would be tempted to buy a few on dips and down-days.

For long-term investors, there could be recovery potential on offer. BP seems to offer a wide margin of safety, as well as a sound overall strategy. Therefore, alongside another turnaround stock which released a trading update on Tuesday, it could be worth a closer look.

Growth potential

The second company in question is surgical and advanced woundcare specialist Advanced Medical Solutions (LSE: AMS). It released a brief update which stated that trading for the year to 31 December is expected to be in line with plan. The company has been able to make good progress with the delivery of its strategy, with its growth rate supported by innovative product development.

Looking ahead, it’s expected to report a rise in earnings of over 9% in the next financial year. This suggests its strategy is sound and that its operating environment remains robust. Earnings growth has, of course, become the norm for the stock. In the last half-decade, it’s been able to increase its bottom line in every year, rising at an annualised rate of 12%.

Given the uncertain prospects for the UK and world economies, companies that are able to offer relatively robust financial prospects, such as Advanced Medical Solutions, could become increasingly popular. Therefore, following its share price decline of 25% in the last four months, it could offer long-term investment potential, in my opinion.

Recovery prospects

As mentioned, the BP share price has experienced a challenging period. The oil price has been a key driver behind weakness across the energy sector, with the price of Brent falling by $28 since early October. This has eradicated all of the gains made between the latter part of 2017 and October, and could mean that investors become increasingly concerned about the outlook for a number of oil and gas companies.

In such a scenario, it could be prudent to focus on larger stocks which may have stronger balance sheets and greater diversity. They may be hit less hard by further falls in the oil price, while also offering margins of safety, which suggest that successful turnarounds could be ahead. Although BP has experienced financial difficulty in the past, it appears to have a strong asset base and improving financial outlook.

Following its share price fall, the company trades on a price-to-earnings (P/E) ratio of around 11.8. This suggests that it may offer good value for money. As with any falling asset, there could be further declines ahead. But in the long run, today’s price seems attractive, in my opinion.

Advance!

This is a 6% increase at constant currency and was further supported by a gross margin improvement of 300 basis points to a whacking 63% for the six months to 30 June. Branded revenues climbed 10% to £30.1m, more than offsetting a dip in its OEM business unit, where sales fell 6% on weakness in the woundcare market.

The £688m AIM-listed stock is scoring in the US, where revenues rose 16% to £10.5m, or 27% at constant currency. Market share volume increased from 24% to 28%. Today’s interims included a 19% rise in adjusted profit before tax to £13.7m, a 16% rise in adjusted diluted earnings per share (EPS) to 5.01p, and a 29% rise in net cash, which leaves the company sitting on a healthy £71.1m.

Growth prospects

CEO Chris Meredith said full-year trading was in line with expectations and the board remained optimistic about the group’s organic growth prospects as the R&D pipeline grows and it seeks acquisition opportunities.

The stock is up a whopping 252% over five years and EPS are forecast to grow 6% this year, and 9% next. The downside is that its healthy growth prospects are in the price, with a forward valuation of 33 times earnings. Today, the board lifted the interim dividend share 20% to 0.42p. It yields just 0.4%, but with a healthy net cash balance and dividend cover of 8.4, further progression looks likely. My colleague Rupert Hargreaves certainly thinks so.

Low Energy

Advanced Medical Solutions hasn’t attracted a fraction of the attention of 88 Energy (LSE: 88E), a £64m oil exploration minnow which operates the majority of the vast 475,000 acre Project Icewine, targeting oil on the world-class North Slope of Alaska. This stock has attracted Alaskan-sized interest but, so far, investors have nothing to show for it.

The AIM-quoted group has been on a slippery slope since peaking at 2.81p on 4 June, following positive reports of progress at Project Icewine, in which it holds a 63% stake. However, subsequent news flow has disappointed as, later that month, it reported “no meaningful change” to the composition of gas and fluid returned from production testing at its number-two well.

88 in a state

Managing director Dave Wall is holding out hope saying the well “remains in its infancy and shows great promise.” But within days it had suspended work, with predictable consequences for the share price. 88 Energy now trades at just 1.20p.

As fellow-colleague Roland Head points out, with a net debt of $7.2m Icewine won’t go ahead unless it can draw in a new partner. Management is now pursuing its Western Blocks project through wholly-owned subsidiary Captivate Energy Alaska, which has a potential 400m barrels of oil and a 25-30% geological chance of success.

I tip my hat to investors who can take a punt on oil explorers like this one. But I’ve seen too many dry up to join their number. I prefer the strong, solid prospects on offer from Advanced Medical Solutions.

Beating the market 

Brooks has been punching above its weight in recent years. The firm has expanded rapidly, building on its physical presence around the UK to attract high net worth clients to its award-winning offering. 

According to a trading update issued by the firm today, discretion funds under management totalled £11.66bn at the end of March, a decrease of 0.7% over the quarter. While the decline is disappointing, it’s mostly due to market volatility during the period. Indeed, according to the update, new business totalled £343m for the quarter. Investment performance, on the other hand, detracted £422m from total funds under management. For some comparison, over the period the MSCI WMA Private Investor Balanced Index — a closely watched benchmark for private investor returns — decreased by 4.5%. 

Commenting on these numbers, CEO Caroline Connellan declared that the firm’s performance during the period demonstrated the “value of good active management in difficult markets.” 

As Brooks continues to exhibit “good active management” I believe that the company will continue to produce outsized returns for investors.

Over the past decade, the stock has returned 23.8% per annum. At this rate, a £1,000 investment made 10 years ago would be worth £9,500 today. Earnings growth has been the primary driver behind these gains. If the firm hits City growth targets for the next two years, it will have managed to grow earnings per share 100% in just five years. 

What’s more, over the past six years, the dividend per share has risen at a compound annual rate of 17.3%, and there’s still plenty of room for payout growth. The distribution is covered 2.3 times by earnings per share. 

And despite all of the above, shares in Brooks still look cheap. The stock is currently trading at a forward P/E of 13.8 and supports a yield of 3.1%.

Cash cow 

Another small-cap that I believe can produce significant gains for investors is Advanced Medical Solutions (LSE: AMS). 

A manufacturer of wound care solutions, Advanced’s growth over the past six years has been nothing short of outstanding. Revenues have doubled over this period, and so has net profit. 

But what I really like about this business is its cash generation. Since inception, the group has been a cash cow, and today, the firm has a net cash balance of around £63m, just under 10% of its market capitalisation.

As the business does not require much in capital spending, the company has lots of options regarding what it can do with these funds, including boosting the dividend payout to investors. While the shares only yield 0.4% today, the payout is covered nine times by earnings per share and, according to my figures, the firm has enough cash to maintain its payout for more than 10 years at current rates if profits fall to zero. Management is also “actively reviewing M&A opportunities that will further increase value for shareholders” according to Advanced’s latest full-year results release.

However, if the world economy experiences a difficult period, those same shares could produce disappointing returns. As such, buying companies with lower positive correlation to the macroeconomic outlook could be a shrewd move. Here are two prime examples which could be worth a closer look.

Improving performance

Reporting on Wednesday was surgical and advanced wound care specialist Advanced Medical Solutions (LSE: AMS). The company reported full-year results which showed a rise in revenue of 12% at constant currency, with it reaching £96.9m. Branded revenues were up by 16%, while there was also strong performance in OEM revenues. They increased by 8% and contributed to a rise in adjusted diluted earnings per share of 23%.

Encouragingly, the performance of the company’s LiquiBand topical tissue adhesives was strong. Revenues increased by 30%, while in the US they were up by 47%. This could prove to be a key market for the business and it may be a positive catalyst on its overall financial performance.

Advanced Medical Solutions continues to consider acquisitions, while also investing heavily in R&D. This twin approach to growth could lead to improving financial performance, while also creating a more dominant business in a range of markets. Therefore, with the stock forecast to post a rise in its bottom line of 8% in each of the next two years, it appears to be a sound buy for the long term.

Turnaround potential

Also offering growth potential within the healthcare space is pharmaceutical company AstraZeneca (LSE: AZN). The business has endured a hugely challenging period which has seen its financial performance come under pressure. The so-called ‘patent cliff’ has been a disaster for the company, with its bottom line in the current year expected to be around half of what it was in 2013.

However, over the last five years the company has been able to invest in its pipeline. This is yet to have a clear impact on its profitability, but it has helped to diversity its operations and create new areas of future growth. In fact, the strategy is set to bear fruit next year when AstraZeneca is expected to deliver a rise in its bottom line of 12%.

After such a challenging period, investor sentiment is understandably weak. The stock trades on a price-to-earnings growth (PEG) ratio of just 1.4. For such a diverse and financially sound business which offers significant defensive qualities, that seems to be a highly attractive price to pay. As such, it could be worth buying now for the long term.