Resilient demand

For example, I’m keen on soft drinks provider Britvic (LSE: BVIC). In July, the company posted its third-quarter trading statement covering the period to 30 June. And the headline read: “On track to deliver a full-year performance in line with expectations”.

City analysts expect earnings to rebound by around 36% in the current trading year to September. And they predict an uplift the following year of almost 7%. However, Britvic suffered declining earnings from 2019 to 2021. The pandemic wasn’t kind to the business. And there’s some risk earnings could be lumpy in the future.

However, chief executive Simon Litherland said the year-on-year performance in the quarter “reflects continued resilient demand”. He acknowledged the uncertain economic environment could “weigh on consumer confidence”. But he asserted that soft drinks is a “resilient” category. And he was “confident” Britvic will perform in line with market expectations.

With the share price near 849p, the forward-looking dividend yield is around 3.7% for the trading year to September 2023. It’s possible for any business to miss its estimates if trading deteriorates. However, I find the yield attractive and would aim to hold the stock for the long haul. 

Record order book and profits

I’m also drawn to groundworks and geotechnical specialist contractor Keller (LSE: KLR). At the beginning of August, the company released a robust set of half-year numbers and a positive outlook statement.

Chief executive Michael Speakman said he has “confidence” the business will deliver on expectations for the full year and in the long term. And his optimism is underpinned by “record” profits and a 22% uplift in the order book on a constant currency basis.

City analysts predict single-digit percentage increases in the shareholder dividend for 2022 and 2023. And with the share price near 761p, the forward-looking yield is just above 5%. I reckon that’s a decent yield from a business with a multi-year record of consistent dividend payments. And that record, plus a number of new contract wins, is prompting me to set aside my concerns about any cyclicality in the business.

Strong liquidity and capital

I like the look of Investec (LSE: INVP), which provides international banking, investment and wealth management services in South Africa and the UK.

In May, the company delivered a strong set of full-year results. Chief executive Fani Titi said adjusted earnings came in at “the top end” of previous guidance at just above 55p per share. And that was ahead of pre-Covid levels.

Titi reckons Investec has “strong” liquidity and capital to support growth. And the business is “well positioned” to handle the uncertain outlook caused by inflation. 

City analysts expect a single-digit rise in the dividend for the current trading year to March 2023. And they predict a 14% rise the following year. So with the share price near 450p, the forward-looking dividend yield is running above 6%.

Financial companies like this can suffer from cyclicality of earnings. But there are no sign of weakness ahead and I’m attracted to that chunky yield.

Both of the companies I’ve looked at today have delivered share price returns of at least 70% over the last year. Should I jump on board and buy these fast-growing stocks, or is it too late?

Solid foundations

The share price of groundworks contractor Keller Group (LSE: KLR) is up by 10%, as I write. Keller went through a difficult patch in 2018. This small-cap stock is a former FTSE 250 name, but a difficult period in 2018 set the business back.

The good news is that Keller has been recovering steadily since, despite the impact of the pandemic. Pre-tax profit rose by 24% in 2020 and the company has just said 2021 profits are expected to be “materially ahead” of previous expectations.

I should point out that Keller isn’t just any old construction company. It’s a “geotechnical solutions specialist”. Past projects have included building the foundations for stadiums, container ports and oil refineries. Keller has also been responsible for underpinning central London property where new tunnels and sewers are being built.

The company’s financial situation looks quite healthy to me, and Keller has maintained or increased its dividend every year since 1994.

However, there are a couple of risks that make me cautious about investing in construction. First, this is a cyclical sector — we do see boom and bust cycles. Second, the kind of projects Keller works on are large but have quite low profit margins. One troublesome project can have a big impact on annual profits.

Despite these risks, I’ve always been impressed by Keller. I think the group’s specialist focus on infrastructure means demand is likely to stay strong over the next few years.

With that in mind, I think the shares look reasonably priced, with a price/earnings ratio of 12 and a 4% dividend yield. This is a stock I’d consider buying.

This small-cap stock has doubled in a year

My second pick is £100m property firm Belvoir (LSE: BLV). This group manages franchised estate agency chains including Belvoir and Northwood, and also has a mortgage business. In total, Belvoir has 439 offices across the UK. These manage over 70,000 rental properties and handled more than 8,000 home sales last year.

The latest update from Belvoir suggests that the housing market remains pretty strong. Revenue rose by 41% during the first half of 2021 and the company expects to report a strong result for the full year.

I’m always careful about investing in property stocks because of the potential for a housing slump. A sharp drop in home sales could hit the group’s fee income. However, I think the group’s strong presence in the rental market should help to offset this risk. Even during lockdowns, rental fees remained fairly stable.

Belvoir shares currently trade around 15 times forecast earnings, with a 2.5% dividend yield. The stock has doubled over the last year and I’m not sure it’s cheap anymore.

However, I think Belvoir is a good quality business that’s well run. I’d still consider buying the stock and would certainly keep holding if I already owned it.

But in volatile conditions like these, I reckon it’s a good time to focus on buying the shares of good businesses. And if I hold my selections for a long time, short-term market fluctuations become less important.

Why I think these are UK shares to buy

Right now, for example, I’m keen on geotechnical and groundworks contractor Keller (LSE: KLR). The company issued a positive outlook statement in May. And the business has been recovering well from the challenges of the pandemic.

City analysts expect earnings to rebound higher by around 27% in 2022. And with the share price near 847p, the forward-looking price-to-earnings ratio is just below 10. I think that looks like good value. And on top of that, shareholders will likely collect a dividend for the 2022 trading year, yielding just over 4.5% measured against today’s share-price level.

Meanwhile, the growth strategy is rolling out at pace. And on 14 July, Keller announced the bolt-on acquisition of a geotechnical company called RECON Services in America. The directors said the purchase will help Keller become “the preferred international geotechnical specialist contractor.”

Overall, in a world that looks set to focus on infrastructure development as it ‘builds back better’, I think Keller looks well-placed. However I could, of course, be wrong. And if further general economic weakness causes earnings to slip, I could easily lose money on the shares. Nevertheless, I’d embrace the risks now and add the stock to my long-term diversified portfolio.

But I’d also play the long-term recovery and growth theme with Braemar Shipping Services (LSE: BMS). The company is an international shipbroker and also provides advice in shipping investment, chartering, risk management and logistics services.

Riding the gathering recovery

I’m bullish on the long-term potential for world economies to recover and prosper in the years ahead. And I reckon businesses providing shipping services will likely do well if commercial activity increases. 

And in the full-year results report released on 3 June, chief executive James Grundy appeared optimistic as well. He said the business exceeded the directors’ expectations for financial performance in the trading year to February. And there was progress in realigning the business to a new, “growth-oriented” shipbroking strategy.

Grundy thinks Braemar is in a good position to capitalise on ongoing global recovery. And he said the outlook “for the next few years” is positive. Meanwhile, City analysts expect earnings to make some impressive double-digit percentage advances in the current trading year and in the following year to February 2023.

Looking for higher earnings ahead

With the share price near 288p, the forward-looking earnings multiple is just below 11. I don’t think that’s an outrageous valuation. But I wouldn’t expect the price-to-earnings number to move much higher. After all, shipbroking remains a cyclical pursuit. And there’s potential for earnings and the share price to fall in the years ahead… as well as the possibility they could move higher.

I reckon the success of an investment in Braemar Shipping Services now relies on ongoing progress with earnings. And that seems likely, to me. So I’d embrace the risks and buy the stock now.

I’m not searching for over-priced growth stocks with high price momentum. And I’m not sifting through lists of deep-value stocks crushed by the pandemic.

My focus is on shares with decent businesses and opportunities to grow their operations in the years ahead. And I want those companies to have sound finances and attractive valuations.

Holding for potential growth

When I find them, I’m keen to buy the stocks and add them to my diversified portfolio with the aim of holding them for a period of months or years. That will give the markets time to reappraise and rerate the shares to account for the value building in the underlying business.

However, nothing is guaranteed when it comes to UK small-cap shares. I could be wrong in my analysis of the underlying businesses. And unexpected news may surface to pull the rug from under the stocks I’m holding. Nevertheless, I’d embrace the risks in the pursuit of higher returns.

Right now, for example, I’m keen on groundworks and “geotechnical solutions specialist” contractor Keller (LSE: KLR). In an update on 19 May, the company issued a positive outlook for the business. There’s a second-half bias to trading, but the directors expect to meet expectations for the full year in 2021.

City analysts predict earnings will decline by just over 30%, because of the pandemic, with a strong rebound in 2022. Meanwhile, the business has a strong multi-year record of rising cash flow and shareholder dividends. And with the share price near 805p, I reckon the forward-looking earnings multiple for 2022 is undemanding at just above nine.

However, groundworks contracting is a cyclical sector. And earnings have been volatile in the past. If a general economic downturn arrives, I could lose money with the shares. Nevertheless, I’d embrace the risk and add this UK small-cap share to my diversified portfolio.

Diversifying across UK small-cap shares

But Keller’s market capitalisation near £582m means the company deserves its place in the FTSE Small Cap index. And investing in small-caps can bring enhanced opportunities for investors as well as increased risks. It’s an age-old dilemma for me. Should I go for smaller companies in the pursuit of higher returns, or stick with big-cap shares because they tend to be more stable with well-established underlying businesses?

One way I’m aiming to answer that question and capture upside is by investing in small-cap funds that invest in a diverse array of related businesses. So far, the strategy’s working well. And it’s worthwhile because the FTSE Small Cap index has been a vibrant benchmark that’s often difficult to beat with stock picking. So, if I choose a fund that aims to follow it, I could be onto a decent long-term investment. However, past performance is no guarantee for the future.

For me, the solution to the investing conundrum is to target growth from UK small-cap investments using the shares of individual companies, trackers and managed funds.

The macroeconomic outlook is chilly at best, but significant downturns in the global economy are nothing new. Provided that you’ve selected your shares with due skill and attention then your investment portfolio should still generate some great returns for you.

Remember that the key to successful share investing is to buy shares with a view to holding them for five, 10, 20 years, perhaps more. These sort of timescales allow your investments to recover from temporary macroeconomic turbulence, and with a bit of luck generate some life-changing profits. Despite the threat posed by Covid-19 over the short-to-medium term, too, there remains an abundance of shares that could help you to retire early and/or realise your other goals.

Want to retire early?

One of these stocks attracting my attention is Keller Group (LSE: KLR). It’s particularly great for those looking to squeeze every ounce of value out of their investments. At current prices around 660p per share it trades on a forward P/E ratio of 11 times and carries a meaty 5% dividend yield, too.

Keller Group could see business suffer in the near term as the global construction industry shrinks. However, the small cap — which describes itself as “the world’s largest geotechnical contractor” — can rely on the niche nature operations as well as its scale to help it navigate the worst that a slowing world economy will cause. It also has a £1bn-plus order book to help support it in the immediate future.

Keller could receive extra support from another source. The tough economic backdrop means that new infrastructure stimulus in some of its major regions like North America could be introduced. This could boost demand for its high-tech solutions. And I’m confident that it should ride the economic recovery when it eventually comes to huge success. It’s a great buy for anyone looking to retire early.

Another 5% dividend yield

Mears Group (LSE: MER) is another share that should navigate the global economic cooldown than most. Why? It provides a variety of services that we cannot do without irrespective of broader conditions.

But forget about its defensive characteristics for a second: the small cap’s expertise in social care and housing services put it in great shape to ride two significant phenomena in the years ahead. Increased social housing is needed to meet the growing population. And exploding demand for care services amid a rapidly-ageing population also bodes well for future profits.

I don’t think its excellent defensive characteristics nor its exceptional structural opportunities are reflected at current prices of 155p, though. Mears carries a forward P/E ratio of below 8 times. It boasts a chunky 5.2% dividend yield as well. This is a share that has all the tools to make its investors big returns and possibly retire early. And I think it’s brilliant buy for both dividend and value investors.

It’s music to the ears of every shareholder. Trading has been better than the directors’ expectations and nowhere near as poor through the coronavirus crisis as many feared.

Participating in the stock market rally

The update covers trading in 2020 so far, and it’s good news. I last reported on Keller on 23 April when the firm issued an earlier update. Back then, the company said first-quarter trading had been better than expectations but Covid-19 affected operations during the second half of March.

The share price drifted a little higher over the weeks following, but investors needed to know more about how things were going. And today, we learn that trading through the second quarter has been “resilient.”  The directors said the pandemic has not affected operations as much as they previously anticipated.

Keller operates in many countries around the world and there have been regional variations. But overall, “the vast majority” of sites where the company is working have remained open. 

Meanwhile, the shareholder dividend relating to last year has been on hold. But today, the directors announced it “both prudent and appropriate” to maintain the full-year dividend at the prior year’s level. So that’s a payment of 35.9p in total for 2019.

To add context, it reckons the decision reflects the ongoing financial strength of the company, along with its “significant” liquidity position, and trading during the first half of the year. On top of that, the directors have confidence in the longer-term performance of the business.

An impressive dividend record

And Keller’s record on dividends is impressive. Today’s decision continues the progression of the payment to shareholders. It’s been maintained annually or increased every year since 1994. The company operates in a cyclical sector. But I think the dividend performance underlines how well the firm has been growing too.

With the shares at 690p, the historical dividend yield is just above 5%, which strikes me as being attractive given the long record of dividend growth. However, the directors have postponed the decision about the 2020 interim dividend. They will not deliver their verdict about the payment in August with the results, but will defer reviewing the situation until later in the year.

Looking ahead, the directors said in the update they are “cognisant” of the potential impact of an economic slowdown on construction markets. Weaker economies could affect the “volume and quality” of the order book in the fourth quarter and beyond. So, they are not offering any guidance on earnings, in common with many other firms right now. Naturally, though, the directors remain “confident” in the medium-term prospects for the company’s key markets.

I reckon Keller is well placed in the niche it serves and the firm tends to surprise to the upside. On balance, I think the FTSE SmallCap company’s shares are attractive now.

Right now, the groundworks contractor displays decent-looking indicators for growth, value and momentum. And this is one of those businesses that hasn’t screeched to a complete halt. Some trading is going on through the pandemic, albeit with plenty of adaptation to protect staff from the effects of the virus.

A FTSE SmallCap leading its field

I’m doing the company a disservice by describing it as a groundworks company because it’s more than that. But I wanted to get you thinking about the right sector. Keller describes itself as “the world’s largest geotechnical specialist contractor,” and it operates globally.

Today, the company announced the sale of its Brazil operations, which had been on the cards for a while. There was also an update about current trading, which sounds positive overall. I think the outlook is encouraging and see the current weakness in the share price as an opportunity to buy shares in a company leading its field.

Trading for January and February was “marginally above” the directors’ expectations. But there was a “swift” deterioration in activity during the second half of March due to national and regional restrictions on travel and work. However, the performance of the business during March surprised the directors because it wasn’t as bad as they feared. In fact, for the first quarter of the year, the company outperformed last year’s result. And we haven’t heard that from many companies lately!

Naturally, the directors’ have adopted a “broad range” of measures to mitigate the effects of the pandemic on the business and to reduce costs. For example, they’ve cancelled discretionary projects, reduced capital expenditure, and put an “even greater” focus on working capital management. All standard stuff that we are hearing from many companies right now.

Dividend postponed and directors’ haircut

Keller is also using government support on offer across its markets. For example, schemes such as furlough and tax deferrals. But the shareholder dividend has been put on hold because it requires approval at the AGM, which has been postponed. The directors now plan to pay the dividend on 21 August. And in an act that I reckon displays the integrity of the management team, the directors and managers have ‘awarded’ themselves a 20% reduction in fees and salaries “during the second quarter”.

Looking ahead, Keller expects to return to work on most of the contracts being affected by the crisis. Meanwhile, the order book in the near term “remains largely unaffected,” which is great news.

Meanwhile, at the end of March, the company recorded net debt of £251m. This compares to last year’s operating profit of around £74m. And undrawn committed and uncommitted borrowing facilities stood at £238m. The balance sheet also shows cash and equivalents of £87m. 

My guess is that Keller has enough financial firepower to survive the duration of the crisis, especially since some trading continues. The directors have abandoned specific forward-looking guidance for the time being. But with the share price at 590p as I write, it remains more than 30% down from its peak in mid-February, despite responding well to today’s update. I’d buy the stock.

Bumpy trading, but cheap

The Keller share price has wiggled about a bit in the meantime and essentially ended up close to where it was in March. Meanwhile, the valuation continues to look undemanding. The current share price near 636p throws out a forward-looking earnings multiple for 2020 of just over six, and the anticipated dividend yield runs near 6.3%.

There’s no doubt Keller has experienced a few troubles in recent years, and a restructuring programme started in 2018. But that hasn’t stopped the dividend progressing, and it’s up around 50% over the past five years. City analysts following the firm expect steady advances in the payment ahead measured in mid-single-digit percentages.

Yet today’s half-year figures reveal to us that trading started slowly at the beginning of the year, but there was “increased momentum” in the second quarter. Overall in the first half, constant currency revenue declined by 2% compared to the equivalent period the year before, and underlying earnings per share dropped 36%.

By geography, the revenue outcome was driven by growth in North America, Europe, the Middle East and Africa, which was offset by a decline in the Asia Pacific region.

The decline in profits was driven by the completion in 2018 of two large projects in the company’s Europe, Middle East and Africa division. Maybe we can expect new work to rebuild earnings down the road because the order book runs “in excess” of £1bn, and is “particularly strong” in North America. Although that’s offset by a decline in the order book of the restructured Asia Pacific division.

Flat revenue this year, positive outlook beyond

But there are some brighter spots in the numbers too. Net debt eased back by 11% to around £333m because of “an increased focus” on capital expenditure (CapEx) and working capital. The directors slapped another 5% on the interim dividend, thus keeping up the ongoing record of progression.

The company expects trading in the second half of the year to be “stronger”, which should deliver a revenue outcome for the year “broadly flat” compared to 2018. Chief executive Alain Michaelis has a positive view of the future for the company and said in the report “strong” underlying market fundamentals revolve around “ongoing global demand for urbanisation and infrastructure growth.”

I must admit I’m conflicted over this stock right now. If you’re expecting a global economic depression anytime soon you probably wouldn’t touch Keller with a barge pole. But it looks cheap, and if world economies soar away from here into a new era of prosperity, maybe Keller stock will do well.

I remain tempted but haven’t pulled the trigger on the shares yet. However, I do think Keller is too cheap to ignore and could be worth keeping an eye on.

The company describes itself as “the world’s largest geotechnical specialist contractor providing a wide portfolio of advanced foundation and ground improvement techniques used across the entire construction sector.” One of the great worries I reckon investors have always had about this one is that it serves a notoriously cyclical industry. And that’s why the valuation has been kept pegged down by the market and the dividend yield has been running well above 6%. Indeed, if an economic slump arrives, earnings, the dividend and the share price could all plunge together.

Upside potential

But cyclical shares offer upside potential too. When things go unexpectedly well, we often see rapid share-price advances, and today’s action suggests that we could be at the start of a sustained up-move with Keller. I wouldn’t buy and hold a cyclical share like this for the long term, but it can be a decent strategy to buy and sell at opportune times to try to capture the big moves.

The report today tells us trading and earnings were in line with revised expectations and the figure for net debt came in “better than consensus,” at just over £286m. Borrowings are running around three times the level of underlying operating profit for 2018, which I think is high for a cyclical firm. If trade does fall off in a general economic slump down the road, the level of debt could be a problem. 

Constant currency revenue rose 11% compared to the year before, 6% because of organic growth and 5% following the acquisition in the period of a company called Moretrench in the USA, an area that already delivers around half the firm’s revenue. However, underlying diluted earnings per share declined by 20%.

Trouble overcome

There’s been some trouble in the enterprise because of “underperforming business units,” and the results show a restructuring charge of just over £61m. The bottom line showed a statutory loss of 13.8m, which compares to a profit of a little over £87m in 2017.

Chief executive Alain Michaels was candid in the report and said the outcome for the year is “deeply unsatisfactory.”  But he thinks the firm’s decisive action restructuring four of the business units has been successful. The company closed its heavy foundations business in Singapore and Malaysia, restructured its Waterway business in Australia and downsized its operations in Brazil and Africa because of adverse market conditions.

Looking forward, Michaels said the stable market outlook combines with Keller’s leading position in the industry and its £1bn order book to make the outlook for 2019 positive. The directors underlined their confidence by increasing the total dividend for the year by 5%.

I think the decisive action taken to bear down on underperforming operations could have set the firm up well for the future and I find the big and rising dividend attractive. I’m tempted to take a small position in the shares to see what happens next.

Stanley’s road

Wealth manager Charles Stanley Group (LSE: CAY) is up more than 3% after reporting continued revenue growth across all divisions, with core business revenue up 5% to £77.7m.  It also announced a 5% increase in funds under management and administration to £25bn, with discretionary funds up by 7.3% to £13.2bn.

Core business profit before tax rose 5.6% to £5.7m, with profit margins increasing from 8.4% to 9.3%. Charles Stanley also boasted of a “robust balance sheet”, with net assets of £102.8m and cash balances of £67m. It’s also boosted its capital adequacy ratio 177% to 193%, while investors are clearly pleased with the 10% interim dividend increase to 2.75p per share.

Today’s interim results for the six months ended 30 September offer plenty of positives. They also confirm the success of its restructuring progress, after it posted a net loss of of £6.2m in 2015, due to tough competition and lack of volatility.

Up and down

The £152m group now trades at 14.5 times earnings, with a forecast yield of 3.7%. Earnings growth looks healthy too, forecast at 29% for the year to 31 March 2019, then 35% the year after. Charles Stanley expects to make continued progress in the second half of the financial year, although this will partly depend on trading levels which it has less control over. I’ve held this stock before and may be tempted to look at it again.

This hasn’t been such a good day for ground engineering specialists Keller Group (LSE: KLR), which is down 4% after reporting that its outlook for 2019 is “somewhat mixed.” Its trading update said that although its main markets remain healthy and the order book sound, “as previously indicated the contribution from major projects will be lower than this year.”

Going to ground

Last month, Keller’s stock plunged 25% after issuing a profit warning. Its APAC division is on course to make a pre-tax loss of between £12m-£15m in 2018, instead of the small profit expected, due to deteriorating ASEAN market conditions. Following a management review it’s exiting low margin activities in Singapore and Malaysia, with combined revenues of around £60m, to focus on higher-margin sectors where it holds a technological advantage. It hopes this will return its APAC operations to profit in 2019.

Its geotechnical businesses traded in line with expectations in North America, avoiding any material impact from Hurricanes Florence and Michael, although unusually poor weather in Texas in October has adversely affected its Suncoast business, already hit by rising steel prices.

Not my bag

Growth in Keller’s core European, Middle Eastern and North African markets has “continued to be offset by challenging market conditions in Brazil and South Africa, reflecting the geo-political environment in those countries.”

Somewhat mixed is an understatement. Trading at 595p, Keller has lost half its value since peaking at 1,281p in February 2014. You could take a punt on its tempting forecast valuation of 5.8 times earnings and forward yield of 5.8%, with cover of 2.3, but I won’t be joining you.