Riding the cycling revolution

The last couple of years have been bittersweet for car parts and bicycle retailer Halfords Group (LSE: HFD). Sales of its bikes rocketed as Covid-19 gym lockdowns prompted people to find other ways to get fit. However, severe supply chain problems meant the business hasn’t been able to capitalise on this trend to its fullest. This is an obstacle that looks set to continue too.

As a long-term investor, I’m tempted to buy Halfords shares. Britain has fallen back in love with cycling and rising investment in cycle infrastructure should continue supporting strong demand for the retailer’s products. Rising environmental awareness should also help sales as more people are expected to hop on their bikes and leave the car at home. Today, this UK share trades on a forward price-to-earnings (P/E) ratio of 10.4 times.

Lok’N load

The self-storage market in the UK is booming. It’s why analysts think earnings at Lok’N Store Group (LSE: LOK) will rocket 188% in this financial year (to June 2022). Demand for space is rising for a number of factors, such as large numbers of people moving house and embarking on home renovations. The growth of e-commerce is fuelling occupancy rates too, as well as supply chain issues encouraging retailers to boost their stock levels.

Based on current earnings forecasts Lok’N Store trades on a forward price-to-earnings growth (PEG) ratio of 0.2. This is comfortably below the benchmark of 1 that suggests a stock could be undervalued. I’d buy the business at these levels even though demand for its storage units could suffer if consumer spending power slips in 2022.

Head to the Kape!

I’d also buy Kape Technologies (LSE: KAPE) to try and make a stack of cash as the cybercrime problems grow. This UK share creates products that keep users’ data secure and private such as VPN software and antivirus programmes. This is a highly competitive environment and success is by no means guaranteed. However, I’m impressed by the breakneck progress Kape’s making in an industry dominated by big hitters like Avast and McAfee.

In its latest financial update, Kape said it expects full-year revenues for 2021 to hit “the upper end” of a forecasted range of $197m-$202m. By comparison, the tech titan punched sales of $122.2m in 2020 and $66.1m the year before that.

Kape’s progress is probably no surprise given the rate at which the cybersecurity market is growing. Researchers at Mordor Intelligence think the industry will be worth $352.5bn by 2026. That compares with the $156.2bn it was valued at last year. I don’t think Kape Technologies’ low PEG ratio of 0.2 reflects its exceptional growth opportunities this decade.

Locking in profits

I first covered self-storage firm Lok n’ Store (LSE: LOK) in April 2018. Since then, its share price has climbed almost 90%. That’s hardly a bad result considering the simplicity of the company’s business model.

As today’s update showed, there’s no shortage of demand for space to store possessions. Trading over the year to the end of July has been “excellent” with occupancy rates bouncing to 85.8%. Back in mid-2020, this was a little under 70%. Revenue also rose 20.9% on the previous year and is “continuing to accelerate“. 

At £225m, LOK is far smaller than its peers Big Yellow and Safestore. However, it’s quietly building a sizeable estate. A pipeline of 13 sites will give the company 38% more space and should provide another boost to earnings. Whether this and recent trading are enough to justify the current valuation is another thing.

LOK trades at 39 times forecast earnings. That’s steep given the lack of barriers to entry in this industry. So, while I’d still buy today (no one knows where share prices will go next), I’d probably wait for the next, inevitable, market wobble before fully investing my capital here.

Rubbish trading

Another example of a company operating in a dry as dust sector that’s nevertheless done well for investors is waste manager Biffa (LSE: BIFF). Its shares are up almost 80% over the past year. 

As at LOK, this momentum looks likely to continue. Trading in the first three months of its new financial year was “well ahead” of even BIFF’s own expectations. Although the outlook is tied to the UK economy, management now thinks adjusted earnings for the full 12 months will come in roughly 10% higher than analysts were predicting.

There are a few near-term headwinds to consider though. The much-publicised shortage of HGV drivers is one. Ongoing issues with Biffa’s supply chain due to Covid-19 could also knock sentiment. 

Then again, the shares still trade on a reasonable valuation of 19 times forecast earnings. As such, I would feel comfortable taking a position today.

Profiting from pests

A final pick of boring but brilliant UK stocks for me to buy is FTSE 100 pest control giant Rentokil Initial (LSE: RTO). The £10bn cap company is a world leader at what it does.

Like the other stocks mentioned, RTO has done well for those owners able to sit on their hands. Those buying back in 2016, for example, will be sitting on a gain of around 150%. Now that its core business is showing signs of rebounding from the pandemic (revenue growth of 18.3% was seen in the first six months of 2021), I suspect the shares could go on setting new highs.

There are still risks, of course. A valuation of 33 times earnings suggests a lot of good news is already priced in. Should the global economic recovery slow, it’s arguably the pricier growth stocks that will be hit the hardest.

Then again, this is far more defensive than the typically glitzy tech play. Again, while I wouldn’t throw everything at the stock today, I regard this solid company as one to drip-feed my money into gradually. 

As Joshua Mahony, Senior Market analyst at IG, notes: “For all the positive efforts we are seeing to administer vaccines worldwide, the virus continues to pose a major risk given the ongoing mutations that are taking place.”

UK share investors have taken fright on signs that these Covid-19 variants could be resistant to vaccines. The merging of mutations in Britain and California has rattled nerves as well. It’s possible that cyclical shares like banks, energy producers and travel providers could come under fresh pressure should mutations continue to emerge.

It’s clear that stock investors need to remain on their toes in 2021. But I don’t plan to stop buying for my Stocks and Shares ISA any time soon. I think there are plenty of UK stocks that should thrive, even in the event of a long economic downturn.

A UK share I’d drink to

I think Diageo (LSE: DGE), for instance, is a perfect UK share for these uncertain times. It’s one I own in my ISA. Demand for alcoholic beverages remains stable during economic upturns and downturns. And this FTSE 100 firm’s drinks, such as Guinness and Captain Morgan, have the sort of colossal brand power that make them ‘must haves’, regardless of economic conditions. People will find a way to fit them in their shopping budgets, whatever the weather. This is why I think the company is worth every inch of its elevated valuation. Today, it trades on a forward price-to-earnings (P/E) ratio of 27 times.

These qualities explain why City analysts reckon Diageo’s earnings will keep rising over the medium term. Bottom-line rises of 3% and 12% are forecast for the fiscal years to June 2021 and 2022 respectively. A word of warning though. City forecasts can miss by a mile if trading conditions suddenly worsen. In the case of Diageo, profits could come under pressure if the Covid-19 crisis does indeed stretch on and bars, restaurants and pubs remain shuttered.

Space hero

Lok’nStore Group (LSE: LOK) is a UK share which could actually benefit from further coronavirus lockdowns. Retailers which operate online have seen demand for their goods balloon as shops have been closed. This has caused a massive scramble for space in which to store their stock, boosting occupancy levels across self-storage facilities.

That said, there’s always a risk that falling consumer confidence of late could lead to reduced demand for Lok’nStore’s spaces, both directly and as a result of falling e-commerce activity. Today, City analysts reckon earnings at this UK stock will rise 35% and 6% in the financial years to June 2021 and 2022 respectively.

This leaves it trading on a forward P/E ratio of 45. It’s the sort of elevated rating that could cause a severe share price correction if trading conditions do indeed begin to deteriorate.

As with many successful and growing publicly-listed companies, this one has a good record of advancement in the financial figures. And that includes an impressive escalation of the shareholder dividend.

A sought-after share

But the stock’s charms haven’t gone unnoticed. The valuation is high, with the forward-looking earnings multiple running near 40 for the trading year to July 2021. However, even after a mighty bounce-back from its recent coronavirus lows, at 570p, the share still needs to advance by around 27% to hit its February high near 725p. I think there’s every chance it will.

A rich valuation tends to automatically put some investors off a stock, and many will move on to the next opportunity. I did that myself for years but discovered such an approach kept me out of most of the best outperformers on the stock market.

Perhaps the key to successfully investing in higher-rated companies is to focus on growth. You should look for a record of solid improvement in the financial numbers. And that’s what I see in Lock’n Store. Of course, the big risk of flirting with higher valuations is any set-back operationally could cause a valuation down-rating. This leads to a plunging share price.

As well as risks, there are opportunities. For example, if you’d have put money into Lok’n Store 10 years ago and left it there until today, you’d be sitting on a capital gain of almost 600%. But some of that gain could have occurred because of a re-rating of the valuation upwards as the growth story became recognised by the market. On top of those gains, you’d have enjoyed a rising income return from the shareholder dividend.

Decent trading and growth on track

Today, the company reported decent progress in most of the ‘right’ figures. And the directors even pushed up the interim dividend by 9%. That decision tells us much. Indeed, all the stores remain open “while maintaining social distancing measures.” On top of that, Lok’n Store has been paying all its staff as normal through the crisis with “minimal use of [the] government furlough scheme.”

Trading so far in the firm’s current trading year to July has been “resilient.” And I think the company’s performance through this pandemic underscores the strength of the business model. Now, I’m beginning to understand why the stock is prized by investors.

Meanwhile, the expansion pipeline looks healthy with 16 sites that chief executive Andrew Jacobs reckons will “significantly increase operating space over the coming years.”  It seems that neither the growth story nor current trading has stalled. I’d be a buyer of the shares here.

The AIM company lifted off in the wake of some truly stunning results for the fiscal year to September 2019. Strong demand growth for self-storage space in the UK is something that I touch upon with some regularity, but even so, those latest numbers from Lok’nStore, a company which has a history of impressing the market, were pretty exceptional.

Thanks to a revenues improvement of more than 10%, to £16.95m, adjusted EBITDA leapt 12% to £7.39m, while net asset value per share ballooned to 533p from 480p in FY2018. On top of this, strong cash flows helped it record a cash balance of £13.6m versus £5m last time around, and this encouraged it to lift the full-year dividend in excess of 9% to 12p per share.

It’s not a surprise to see City analysts predicting another year of payout growth in the current period, a 13.1p per share currently being touted. There are bigger yields than Lok’nStore’s reading of 2%. But I’d argue that the rate at which the firm could find itself still lifting payouts in the years ahead, as it expands its store estate to enable more impressive profits progress, still makes it a great pick for income chasers.

Another dividend hero

Before I let you go, I’d like to speak about RWS Holdings (LSE: RWS), a stock from which I’m expecting some strong financials early next month. Full-year numbers (for the period ending September) are scheduled for release on December 10.

This AIM-quoted stock is seeing demand for its translation services take off and in October announced that revenues would likely be up 16% for the full year, at £355m. That’s thanks to a combination of strong organic growth at the core, the positive contributions of its Moravia and Alpha Translations Canada acquisitions and favourable currency movements.

Like Lok’nStore, RWS isn’t famed for the size of its dividends yields. For the current year this sits at 1.6%, better than the returns one can expect from a Cash ISA, though some way short of the 3.3% broader average for the UK’s mid-caps.

Rather, it’s considered a solid income pick owing to the rate at which it’s lifted annual payouts over the past half a decade, including a 15% rise to 7.5p when it reported for fiscal 2018. A hike to 8.6p is predicted by City analysts for the year just passed and another rise to 9.5p for the present period. With profits booming and cash soaring through the roof, RWS is a share I’d buy in expectations of rampant dividend growth for some time to come, and particularly as it likely chases down more M&A targets.

My investing strategy is to add stocks to my ISA that can provide long-term income growth. Right now, I’m looking for shares that will be reliable performers even if the economy does start to slow.

In this article I’ll explain why I’d buy Tesco (LSE: TSCO) shares today for my ISA. I also plan to look at a smaller stock which I think could be a similar long-term defensive winner.

1. A proven winner

Tesco is by far the biggest supermarket in the UK, with a market share of 27%, versus about 15% each for second-place Sainsbury’s and Asda.

Tesco is also the most profitable of the UK’s listed supermarkets. I think this is at least partly due to the economies of scale that result from its size.

Supermarkets are generally seen as a defensive investment. Even during recessions, people’s shopping habits tend to remain relatively unchanged. I think it’s worth having at least a few defensive stocks in your portfolio, to help smooth out the more volatile performance of cyclical businesses.

During his five years in charge, chief executive Dave Lewis has cut debt and returned the business to growth. Mr Lewis is leaving next year, but I expect his replacement, Ken Murphy to deliver continued progress and a rising dividend.

2. The price is right

The Tesco share price has risen by 23% so far in 2019. The shares may no longer be an outright bargain, but I don’t think they’re overpriced.

Earnings growth is expected to run at between 5% and 10% over the next couple of years, while dividend growth is expected to be higher. Against this outlook, I think the stock’s valuation on 14 times 2019/20 earnings looks reasonable.

Although Tesco’s dividend yield of 3.4% is below the FTSE 100 average of 4.5%, I expect the payout to continue rising. In my view, the shares make good sense as a defensive long-term income buy.

What about growth?

I don’t think Tesco is likely to get all that much bigger than it is already. But I have identified one sector that seems to have defensive characteristics and strong growth potential.

Self-storage has proved increasingly popular in towns and cities as more people rent or live in shared accommodation. Growth in this sector has been strong for a number of years, but results from upcoming firm Lok’n Store Group (LSE: LOK) suggest to me that there’s plenty of gas left in the tank.

Another 40%?

In numbers released today, Lok’n Store said that its sales rose by 10.3% to £17m last year, while underlying operating profit rose by 11.1% to £5.1m. Importantly, the group improved both its occupancy levels (+6%) and unit pricing (+0.6%).

Five new stores were opened during the year to 31 July and the firm has a pipeline of 14 stores. As these stores are opened, they will increase the group’s current estate by more than 40%, to 48 stores.

The UK self-storage market is highly fragmented. Professional operators like Lok’n Store are aiming to modernise and consolidate the industry. Although LOK shares trade at a premium to book value and yield just 2.1%, I believe they remain a decent buy for growth.

Take Greencore Group (LSE: GNC), for example. Its share price has dropped almost 10% since third-quarter financials were released a fortnight ago, weakness which leaves it trading on a mere forward P/E ratio of 13.7 times.

That release advised that sales from the core food-to-go division grew just 0.6% between April and June, a result which it said reflected “weak market conditions with unseasonal weather [and] a varied trading performance across the customer portfolio.” The result also reflected tough comparatives, but the market remained quite unforgiving. And I consider this to be an extremely short-sighted approach.

Go green

Make no mistake: the food-to-go market is increasingly big business and through its broad range of sandwiches, salads and sushi, Greencore is well placed to capitalise on this. To illustrate this point, think tank IGD suggests that the value of this market will grow by 26.4% between now and 2024 to £23.4bn, more than double the rate of growth (12.5%) expected for the broader grocery market.

Consumers in this industry sub-segment are becoming more and more demanding, and so food retailers are having to consistently develop their menus to keep growing. Fortunately, Greencore’s devotion to food innovation — which means it has around two-and-a-half thousand products in its armoury — puts it in the box seat to ride this theme. And its sophisticated manufacturing and distribution infrastructure gives it the clout to meet soaring sales rates.

No wonder, then, that  the FTSE 250 firm felt confident enough to hike the interim dividend 11.4% to 2.45p per share. This means that for the full year to September 2019, City analysts are expecting a 6.1p reward, up from 5.57p per share last time out. And this yields a chunky 3.1%

There are bigger yields out there, sure, but I’m confident that the company’s bright long-term earnings outlook and its revamped capital structure should help it to continue raising dividends at a rapid pace. So buy it today on expectations of some seriously juicy dividend cheques in the years ahead, I say.

Lok in serious returns

I’d also happily stash the cash in Lok’N Store Group (LSE: LOK) in the hope of building a big nest egg for retirement.

Once again, yields here aren’t the biggest. For the year ending July 2020, this one sits at 2.5%. However, the rate at which the AIM firm is growing its dividends should make income hunters sit up and take serious notice (up 10% in fiscal 2018 to 11p per share, most recent finals showed).

Preliminaries for the year just passed aren’t due until November 4, though there’s plenty of reason to expect payouts to keep ripping higher. Self-storage revenues rose 8.7% in the 12 months, a result which revealed the underlying strength of the market and the impact of Lok’N Store’s outlet expansion programme. What’s more, with the business currently boasting a secured pipeline of eight new locations — sites which will boost trading space by around 27% — the firm looks to be in great shape to keep growing profits, and therefore dividends, for years to come.

The great thing about these businesses is that you can get exposure to a broad portfolio of properties, even if you only have a small sum to invest. What’s more, you can invest in sectors of the property industry that would usually be out-of-bounds to individual investors, such as self-storage business Lok’n Store (LSE: LOK). 

Self-storage

Lok provides self-storage facilities for clients. It is relatively small with a market capitalisation of just £155m at the time of writing, but it is expanding rapidly. Over the past six years, net profit has increased at a compound annual rate of 22% and earnings per share have grown at a rate of 14% per annum.

As the company has grown, shareholders have been well rewarded. Every £1,000 invested in the business back at the beginning of 2015 is worth nearly £2,500 today.

It doesn’t look like the company is going to slow down any time soon. Today the group reported an 8.7% increase in self-storage revenue for fiscal 2019. A mix of higher prices and more customers looking for storage solutions helped drive growth over the 12 months. Unit occupancy rose 6% year-on-year, and the price per square foot rose 0.6% year-on-year.

Lok opened four new landmark ‘stores’ in Dover, Cardiff, Exeter and Ipswich, as well as acquiring an existing store in Hedge End, Southampton, during the period. On top of this, the company has another eight new landmark sites in development, with the potential to boost its trading space by 27%.

If we assume that these facilities will attract the same level of business as the current portfolio, the new units could power earnings per share higher by around 27% over the next few years.

Considering this pipeline, it seems to me as if Lok’s growth is only just getting started. The shares currently support a dividend yield of 2.3%, and the distribution has doubled over the past five years. 

German business

Another property play with a fantastic record of generating value for shareholders is Sirius Real Estate (LSE: SRE).

Like Lok, Sirius is a relatively unique property business. It is engaged in the operation and development of commercial property in Germany. In total, the company owns 60 business parks across the country, directly and through joint ventures.

Over the past six years, its property portfolio more than doubled in size. Shareholder equity — the total value of assets in a company minus all liabilities — has increased 220% since 2014. Management has financed growth with retained capital and the issue of new shares, keeping borrowing low. Net-debt-to-assets was just 43% at the end of fiscal 2019, down from 93% at the end of 2014. 

And as the firm’s property portfolio has grown, so has the share price. Over the past five years, the stock has produced a total return for investors of nearly 20% per annum, compared to just 6.2% for the FTSE 100. 

I think it could be worthwhile buying into this growth story, and today the stock is on offer. It is trading just above book value per share and offers a dividend yield of 4.5%. 

During the period, the online grocer and designer of highly automated warehouses has announced a string of deals with international retailers and a domestic joint venture with Marks & Spencer. It’s also been rewarded with promotion to the elite FTSE 100 index of the biggest London-listed companies.

Remarkably, for a UK blue-chip, Ocado can’t be valued on a multiple of its earnings. It’s not currently making a profit, and isn’t forecast to do so any time soon. Here, I’ll give my view on its prospects and share price. I’ll also discuss a profitable but more prosaic warehouse specialist: self-storage firm Lok’n Store (LSE: LOK).

Growth in store

Lok’s shares have moved modestly higher on the back of interim results today. At 500p, this AIM-listed firm is valued at a bit under £150m. I like the dynamics of the self-storage industry in the space-strapped UK, and I’ve previously written bullishly about both Lok and its sector peer Big Yellow — a larger (FTSE 250-listed) company, valued at £1.7bn.

Today’s results confirmed my good impression of Lok as a strongly growing business in a structurally under-supplied market. Revenue from continuing operations increased 11.5%, and earnings per share rose 22.2%. Further growth is in the offing with the company having a current pipeline of eight contracted stores, which will add 27% more trading space to its portfolio.

While Ocado can’t be valued on earnings, Lok’s earnings valuation is looking a little stretched at the moment, after a strong performance from its shares over the last 12 months. The outlook for the business is good, but at the current share price, you’ll have pay 39 times forecast earnings to buy in, and get a prospective 2.4% dividend yield. I rate the stock a ‘hold’ at this stage.

Microsoft of retail?

How can we even begin to value Ocado? Well, let’s start with the UK grocery retail business that it’s putting into the 50/50 joint venture with M&S. The deal values the JV, which will trade as Ocado.com, at £1.5bn.

Even if the JV’s worth a bit more than that, it’s clear that by far the larger part of Ocado’s £10bn market capitalisation is the valuation being attributed to the company’s other business of constructing and operating automated warehouses — or Customer Fulfilment Centres (CFCs) — for third parties.

I read one research note, following Ocado’s latest deal, which attempted to answer the key question: what’s priced in already by the market? The analysts (at SocGen), using “favourable assumptions,” said: “We calculate that the ‘market’ is factoring in c.30 additional CFCs over and above the 25 already contracted for.” As you might guess from that, SocGen concluded the stock is “significantly overvalued.”

More bullish brokers have championed Ocado as a technology stock — the “Microsoft of Retail,” as Peel Hunt has put it. However, I think my Foolish colleague Roland Head is on the mark in pointing out that Ocado can’t scale up like a true tech firm.

On balance, I think the risk of overvaluation is high after the terrific rise in the share price. If I held the stock, I’d probably be happy to sell and bank my profits at this stage.

At the same time, there are a number of stocks currently offering high yields. Among them is FTSE 100-member Centrica (LSE: CNA), which has a yield of over 8% after a disappointing period for its share price. With the potential for an improving business model, though, it could be worth buying for the long term.

High valuation

Of course, not all income stocks may be worth buying at the present time. Reporting on Monday was self-storage company Lok’nStore (LSE: LOK), which appears to be overvalued given its financial outlook. It trades on a price-to-earnings (P/E) ratio of 35, despite being forecast to post an earnings rise of 5% in the current financial year. It has a dividend yield of around 2.8% which is only just covered by net profit. As such, it appears to lack a margin of safety, as well as significant dividend growth potential.

Trading in the first half of its financial year has been strong, with revenue rising by 7.7%. Its self-storage unit occupancy was up 8%, while price-per-let square foot increased by 1.4% compared to the same date a year ago. As such, its business appears to be performing relatively well, and further developments to its strategy could enhance this further. But with Lok’nStore having such a high valuation, it appears to be a stock to avoid at the present time.

Income potential

Meanwhile, Centrica’s P/E ratio of 11 indicates it offers a significant margin of safety. Furthermore, a dividend yield of 8.4% in the current year is almost six times the return which is available on a cash ISA. Although dividends are due to be covered 1.1 times by profit this year, such a high dividend yield is likely to mean the income return on offer is significantly greater than many of its FTSE 100 peers able to grow dividends at a fast pace.

Of course, Centrica has faced a challenging period. It’s found the delivery of a new strategy to be somewhat difficult, with its financial performance weak in recent years. However, with it expected to become increasingly efficient as it delivers a variety of cost savings, its financial performance could improve over the medium term.

Since Centrica faces regulatory and political risks at the present time, its shares may lack the defensive appeal which the utility sector has offered in recent years. However, with what seems to be a low valuation and impressive income prospects, it could deliver a higher long-term return than a cash ISA.