CVS Group

What it does: offers veterinary care services through its UK network of 500 surgeries.

Price: £17.38 per share

CVS Group (LSE: CVSG) is a healthcare stock I snapped up in early 2020. It’s one I’d been considering buying for some time as consumer spending on animalcare grew strongly. Soaring pet adoption rates during the Covid-19 crisis encouraged me to build my holdings in the business, too.

The CVS share price has been volatile more recently. And this means the decision to boost my holdings late year hasn’t paid off yet. Still, the vet care provider remains more expensive that it did back in February 2020. So I’m still up by the tune of around 15%.

I continue to believe that CVS will prove a lucrative stock for me to own over the long term, too. This is because pet adoption rates remain rock solid.

As Matt Britzman, equity analyst at Hargreaves Lansdown, has commented: “the UK pet market’s grown 4% per year on a compound basis over the past 5 years and continues to look strong as the pandemic fuelled surge in pet ownership doesn’t look to be going anywhere.”

A safe haven in tough times

I think CVS Group in particular is a good pet-themed stock to own at the current time as well. Animal owners might cut down on discretionary items like toys as the cost of living crisis worsens. But spending on their pets’ health is unlikely to be something they cut back on.

This explains why City analysts expect CVS to continue growing earnings in the short-to-medium term. They expect the company to follow an 8% improvement in annual earnings in the outgoing financial year (to June 2022) with a 6% rise next year.

I am concerned by the growing shortage of veterinary staff in UK. This threatens to push up costs for animalcare specialists like CVS. But on balance I think the potential rewards of owning this top growth stock outweigh the risks.

Redcentric

What it does: provides a range of IT services to businesses.

Price: 121.8p per share

Redcentric (LSE: RCN) is a growth stock I’m considering adding to my portfolio as remote working becomes the norm.

The number of people working away from the office famously boomed during the Covid-19 pandemic. And demand for a blend of home- and workplace-based employment to continue permanently is growing in strength.

According to Barnett Waddingham, some 84% of British businesses have now adopted a ‘hybrid’ working method. Dissatisfaction over flexible working practices was a major reason behind staff resignations over the past year, the consultancy said, illustrating the importance of remote working amongst modern workers.

This bodes well for firms like Redcentric, which can expect demand for their services to rise. This particular IT services business provides networks, security software, cloud platforms and communications systems, which allow workers to complete their tasks efficiently and safely.

Business is booming

Redcentric saw revenues edge 2% higher in the last financial year (to March 2022). Encouragingly, however, the company said that new sales orders “improved significantly” during the final half of the year versus the first six months.

City analysts think Redcentric’s earnings will rise 16% year-on-year in FY2023. This leaves the company trading on what I consider to be an undemanding forward price-to-earnings (P/E) ratio of 14.8 times.

Redcentric doesn’t have the financial clout of the IT industry’s big beasts like Microsoft, IBM and Oracle, to name just a few. It also doesn’t have the brand recognition of these global giants. But I still think it could deliver exceptional investor returns for me over the next decade as its market opportunities grow.

Begbies Traynor Group

What it does: provides a range of services to financially troubled businesses.

Price: 138p per share

I’m considering bulking up my exposure to counter-cyclical UK shares as the economy stalls. It’s a strategy that could limit the impact of worsening conditions on my portfolio.

One way I’m considering doing this is by investing in insolvency practitioner Begbies Traynor Group (LSE: BEG). This is a growth stock that supplies a broad spectrum of services for struggling companies like helping with debt restructuring, asset sales and contingency planning.

New research from accountancy firm BDO suggests a fresh storm is on the horizon for British companies. It says that “almost a fifth say record inflation and the cost of living crisis has or will have a worse impact on their business than Covid-19.”

This is, of course, extremely worrying given the huge number of companies that went to the wall during the pandemic. Indeed, insolvency rates are already rocketing in the UK, and there were 1,991 in April. That was more than double the number of insolvencies recorded a year earlier (925).

Expanding for growth

Begbies Traynor said last month that it expects revenues to have leapt 30% in the financial year to ApriI 2022. And it looks like sales should keep rising strongly over the short to medium term.

But I don’t buy UK shares based on what near-term returns I can expect to make. In the case of Begbies Traynor, I reckon I could make big money over the long term as it continues on its acquisition-led growth strategy.

M&A can throw up unexpected risks that can damage profits and shareholder returns. But so far the company’s successful approach to acquisitions has kept earnings growing solidly year after year. And City analysts are predicting further bottom-line growth of 8% and 3% for fiscal 2023 and 2024, too.

Today, Begbies Traynor trades on a forward P/E ratio of 14.4 times. I think this is a bargain considering the firm’s terrific pedigree of annual earnings growth.

Driving the workplace revolution

I think the post-pandemic boom in remote working provides plenty of opportunity for stock investors like me. One ‘nearly’ penny stock I’m considering buying to play this theme is Redcentric (LSE: RCN).

A survey by telephone equipment supplier Poly shows the enormous sales opportunities IT services businesses like Redcentric have. It showed that just 48% of employers are “fully prepared” for a blend of office-and-home-based working.

At the same time, 80% of companies reckon that flexible working should be offered to new employees, the data showed. This underpenetrated market provides massive opportunity for firms like Redcentric.

Redcentric provides the network and cloud computing software that allows people to work from anywhere. And the business remains busy on the acquisition front to maximise this enormous market opportunity.

The tech giant sealed the game-changing takeover of cloud computing specialist Piksel during the autumn. And in March, it picked up cyber security specialist 7 Elements for a fee of up to £2.4m.

Too cheap to miss?

Now Redcentric doesn’t have the financial clout or the brand recognition of its US tech rivals. The likes of Microsoft and IBM have the means to make things very difficult for smaller players like this.

Still, it’s my opinion that this risk is baked into Redcentric’s low valuation. At 112p per share, the business trades on a forward price-to-earnings growth (PEG) ratio of 0.9.

Remember that any reading below 1 suggests a stock could be undervalued.

Another ‘near’ penny stock to buy

Like Redcentric, Michelmersh Brick Holdings (LSE: MBH) also trades on a sub-1 PEG ratio today. At 117p per share, the building products manufacturer boasts a reading of just 0.4.

As we saw last week, property prices in the UK continue to soar because of a chronic shortage of new homes. Latest data from Nationwide showed average home values rising at their fastest pace since 2004 in March.

It is clear that Britain will need to supercharge build rates over the next decade to soothe the problem. And businesses like Michelmersh will play an important role in this journey. The UK government has laid out plans to create 300,000 new homes each year by the mid-2020s.

Risk vs reward

I am concerned by the impact of rising costs on Michelmersh’s bottom line. Pleasingly, the business has hedged the costs of expected energy usage in the future (making bricks requires massive amounts of power). But inflation elsewhere still poses a risk to profits.

That said, it’s my opinion that the possible benefits of owning this stock outweigh the dangers. Housebuilders are aggressively stepping up construction activity to capitalise on the booming homes market. Pleasingly for Michelmersh, this is a phenomenon that looks set to run and run.  

A top renewable energy stock

Renewable energy stocks offer plenty of opportunity for UK share investors like me. But I don’t just have the option of buying into firms that generate clean energy like wind or solar farm operators. Stocks making the technology that stores energy is another very good way for me to make money.

This is where Gore Street Energy Storage Fund (LSE: GSF) comes in. This ‘nearly’ penny stock buys and constructs battery storage assets the length and breadth of Britain. We don’t stop using electricity when the wind doesn’t blow and the sun doesn’t shine. As a result, these sort of assets are essential to ensure we are constantly supplied with power. And it’s a sector that’s growing quickly as investment in renewable energy sources shifts through the gears.

A word of warning however, Gore Street has a lot of debt on its books. It therefore could see finance costs rise sharply if interest rates soar.

On cloud nine

Technological advancements and changing life/work balances meant remote working was growing strongly before Covid-19. The onset of the pandemic supercharged the practice of working away from the office. It could remain a big part of life in 2022 too, given the current elevated rate of infections.

All this bodes well for firms like Redcentric (LSE: RCN). This particular UK share provides cloud computing services that enable employees to do their jobs wherever there’s an internet connection. Sales have slipped more recently (down 4.1% year-on-year in the six months to September) but this reflects the blowout comparisons of the same 2020 period.

I’m confident Redcentric will get back on the front foot sooner rather than later, helped by its acquisition of Piksel in September. I think it could deliver strong profits growth, despite the threat posed by US industry giants like Microsoft.

A trip to the Zoo

Zoo Media Group’s (LSE: ZOO) another technology company I’d buy for the new year. This near-penny stock supplies a wide range of services for broadcasters, streaming companies and film studios. These include dubbing and subtitling movies and shows, providing script creation assistance, and localising content such as programme titles, synopses and artwork.

The company’s major partners include the likes of Disney, Netflix and WarnerMedia. And I fully expect demand for its services to keep rising as investment in content booms. Disney, for example, is set to raise spending by $8bn year-on-year in 2022, to $33bn. Fierce competition means that other major players, including Apple, Amazon and ViacomCBS, will surely continue spending heavily as well.

I think Zoo Media could make its shareholders stacks of cash in this climate. I’d buy it even though profits could suffer in the near term if soaring Covid-19 cases forces the film and TV industries to close down again.

But I for one think that evolving employee expectations means that remote working practices are set to boom.

US tech giants Microsoft, Facebook and Amazon have all announced plans to introduce more flexible work practices in recent weeks. A slew of FTSE 100 companies, from banking colossus Lloyds and oil major BP to life insurer Aviva, are among a huge number of multinational businesses offering their staff a mix of office and home working.

It’s not just the world’s blue-chips that are taking a scythe to their office-dominated work ethos either. A YouGov survey revealed that only 20% of UK employers will demand their workers come into the office five days a week in future.

Investing for the remote working revolution

This move to more flexible working could well prove temporary if companies decide that productivity is suffering, or that worker morale is taking a hit.

That said, many remain convinced this sea change in working practices is here to stay. This week, UK business secretary Kwasi Kwarteng, for instance, claimed that flexible working is “here to stay.”

There are plenty of top UK shares that stand to gain from the rise of flexible working. FTSE 100 retail share JD Sports Fashion, a market leader in the athleisure clothing segment, has seen demand for its products boom. That has come as people ditch formal workwear at home in favour of more comfortable clothes.

FTSE 250 workspace provider IWG is also benefiting from the growth of hybrid working, as today’s latest trading statement shows.

Perhaps the most obvious UK and US shares to buy are tech stocks which allow workers to remain connected. Video conferencing specialist Zoom, chat provider Slack and file-sharing specialist Dropbox are a few US shares I’d buy to ride this theme.

A ‘nearly’ penny stock I’d buy

IT services provider Redcentric (LSE: RCN) is a UK share you might not have heard of. But this ‘nearly’ penny stock is one whose wide range of services I think should balloon in popularity as flexible working takes off.

Redcentric provides network and cloud computing software which allow workers to set up base away from the office. Meanwhile, its cyber security solutions help companies tackle the elevated threat of hacking that comes with remote working.

This explains why, even in spite of a global recession, revenues rose 4.5% in the financial year ending March. I expect demand for its IT consultancy service to continue growing too as firms try to remain agile and protected.

Now, Redcentric is tiny compared to almost all its US rivals. It trades at 130p per share and has a market-cap of just £203m. But while it lacks the clout of other industry players I’m confident it can still deliver good returns as the remote working phenomenon escalates.

#1: A UK tech share on my watchlist

Getting in on the information technology train could pay off big time in a post-pandemic landscape. Businesses around the globe have accelerated their investment in digitalisation in response to trends like growing e-commerce activity and the rise of homeworking. It’s a trend that looks set to run and run as technology improves.

I would invest in UK shares like Redcentric to hopefully make money from this phenomenon. The business provides network and cloud services that are essential to the execution of flexible working models. City analysts reckon the company’s annual earnings will soar 46% in the current fiscal year. This leaves it trading on a bargain forward price-to-earnings growth (PEG) ratio of 0.4.

UBS analysts reckon the public cloud market will grow at a compound annual growth rate of 20% to 2024. I’d expect Redcentric to deliver strong and sustained profits expansion as a result.

#2: A top stock that sits in my ISA today

I’m also expecting big things from brickmaker Ibstock (LSE: IBST) in the 2020s as housebuilding activity picks up. This week it celebrated the “robust” state of the market, which is underpinned by “a structural deficit of housing, low interest rates, and government policy, which is supportive of the role the construction sector will play in the UK economic recovery.”

Prior to Covid-19, the British government set out a target to create 300,000 new homes a year by the middle of the decade. Clearly Ibstock’s products will be essential in helping it to meet this target. City analysts reckon strong build rates will help the UK share to rocket 178% year on year in 2021. And this leaves it trading on an ultra-low forward PEG ratio of 0.1. I already own this stock in my ISA. At current prices I’m tempted to load up with some more of it too.

#3: Going green

Green energy continues to gain importance as global governments take steps to fight the climate crisis. One way that I can play this theme is by buying stock in Greencoat Renewables (LSE: GRP). This business operates wind farms the length and breadth of Ireland along with a small handful of assets in mainland Europe.

Two years ago, the Irish government announced plans to generate 70% of its electricity from renewables by 2030. This naturally gives Greencoat significant profits opportunities in its core territory. The prospect of ongoing M&A should give investors reason for further excitement too.

City analysts reckon the energy giant will record a 6% earnings rise this year, leaving it on a forward price-to-earnings (P/E) ratio of 16 times. Okay, this doesn’t offer heart-stopping value on paper. But a 5.2% dividend yield makes this UK share an attractive buy for me right now.

The shares look perky today on the release of the IT managed service provider’s half-year results report for the period to 30 September. The figures have been affected by the adoption of IFRS16, which alters the accounting for leases. So Redcentric has provided alternative, pre-IFRS 16 figures for comparison and I’m using those today.

Driving out costs

Revenue declined by 9% compared to the equivalent period last year, adjusted cash from operations dropped by 6%, and adjusted earnings per share shot up by 31%. Net debt declined by 27% to £16.5m. That’s quite a mixed bag of figures, but the directors had no hesitation in slapping 108% on the interim dividend, which makes me think things are going well for the business.

Although revenue was flat in the first quarter it rose in the second quarter driven, the company said in the report, by “logo” wins and cross-selling. Profit margins improved because of cost reductions achieved at the end of the previous trading year. Meanwhile, the firm has been ploughing money back into the business and invested £1.5m in its national network and £1.5m in its infrastructure-as-a-service (IaaS) platform. The company reckons it now has “modern, resilient and scalable platforms and networks.”

During the period, the directors reorganised the product management and development teams, and there is a strategic review under way of the data centre and network portfolios. From the trading year to March 2021 onwards, the directors expect the review to yield annual savings of “at least £2.8m.”

Non-executive chairman Ian Johnson said in the report that there is “strong” visibility of future revenues and 90% of turnover is now recurring, which I reckon adds to the defensive, cash-generating nature of the enterprise.

A potential catalyst for acceleration in growth

However, there’s a cloud hanging over the firm because of an ongoing investigation being conducted by the FCA after accounting errors emerged at the end of 2016. New customers were added in the first six months of the current trading year, Johnson said, but the investigation is affecting the pace of new business wins. 

Looking ahead, the directors are “confident” the business will continue to generate strong cash flows enabling it to return cash to shareholders via the dividend and through the share buy-back programme.

Meanwhile, City analysts expect both earnings and the dividend to advance by percentages north of 20 in the trading year to March 2021. And with the share price at almost 93p, the forward-looking earnings multiple stands at just over 15 and the anticipated dividend yield is around 3.3%.

I think the valuation is attractive given the growth on offer, and the business has the potential to gain further traction when the FCA investigation finally ends. I’m tempted to buy some of the shares.

That’s left us with a stock valued at a super low price-to-earnings of 6.5 (based on forecasts for the full year) with a dividend set to yield 5% – and the dividend would be covered three times by earnings. When I see a share as lowly valued as that, I look for indications of trouble.

But examining Wednesday’s interim results didn’t really uncover any. The franchised motor dealerships chain reported a 5.6% rise in total revenues for the period, with like-for-like revenue up 2.3%. Vertu’s adjusted pre-tax profit did dip a little, from £18.1m at the same stage last year to £17.1m, but the company revealed “Excellent cash conversion of profits with free cash flow of £14.6m generated (2018 H1: £1.9m)“, and lifted its interim dividend by 9% to 0.6p per share.

Upbeat

Despite what he described as “a more challenging backdrop,” chief executive Robert Forrester spoke of “continued growth in high margin aftersales revenues and the continued growth in used car volumes” and added that “Cost and excellent working capital control has again been exhibited.”

On the firm’s current outlook, it’s perhaps not surprising that like-for-like new sales were down in September, or that the firm sees the potential impact of Brexit as one of the major factors likely to affect future business.

But with net cash of £6.6m on the books at 31 August, and such negative market sentiment towards the company, I can’t help wondering if I’m looking at an oversold bargain.

Recovery

Just over a year ago, I asked whether Redcentric (LSE: RCN) was a buy after a 30% share price crash. At the time, the IT services firm had just reported disappointing results and had given CEO Chris Jagusz the push, but it was making the right noises about rectifying the problems underlying its first-half underperformance.

At the time I said I’d want to see how the full year went before I’d consider buying. Those results were positive, and the firm was able to announce an improved dividend policy and the commencement of a share buyback, though at the time the share price had already recovered significantly.

Since my November examination, the Redcentric share price is now up 27%, and a trading update Wednesday suggested things are still going according to plan.

Debt

A key measure for a recovering company to me is always its debt level, and I’m seeing significant progress. Even though Redcentric has paid out £1.5m in dividends and has accelerated its capital expenditure in network and infrastructure, net debt at 30 September was down to £16.5m (from £17.6m at 31 March, and £22.6m in September 2018).

The share buyback has been started, but I have to say I’m often sceptical about such things when there’s debt on the books. And in this case, I can’t help thinking the cash could be put to better use paying down debt – to focus on the balance sheet, not on the share price.

Anyway, Redcentric looks like it is pulling off a successful recovery. And though I still wouldn’t buy just yet, I’m keeping my eyes peeled.

Chairman Chris Cole, speaking of the departure of CEO Chris Jagusz, said: “The results announcement today, whilst showing Redcentric’s resilience, does not demonstrate progress with regard to sales, delivery and execution. The Board has therefore decided that Redcentric’s growth ambitions would be better served with a change of leadership.”

The figures themselves show the IT service management business’s revenue falling by 7.6%, with adjusted EBITDA down 11%, and adjusted EPS slashed by 23.5%.

But it wasn’t all bad. The resumption of the firm’s dividend provided a bit of a sugar coating to the bitter pill — although the interim 0.4p per share, if doubled for the full year, would only yield 1.3%. 

Debt down

Net debt was reduced, by 32% to £22.6m, which is approximately 1.4 times annualised EBITDA (based on the first-half value). I can’t help thinking it would have been better to wait until it was reduced further before putting dividends back in the table — especially as the first six months will have dented confidence in the rest of the year’s performance.

Cole did say that “Redcentric has made strong progress with its programme of driving operational efficiencies, cost control and cash discipline,” and that the firm has taken action to remedy these first-half failures. Maybe we’ve just seen a one-off weak period, but I’d want to see how the full-year goes before I’d consider buying.

Dividend growth?

Housing services firm Mitie (LSE: MTO) is one I’ve been cautious over for a while, and I’ve been looking at it again after Thursday’s first-half figures. What I’m particularly looking for is support for the company’s forecast return to progressive dividends after tough trading led to them being slashed. I think I still need a bit more convincing.

A 4% rise in revenue from continuing operations to £1,041m was welcome, although a 4.2% fall in operating profit (before exceptionals) to £38.4m took some of the shine off that.

A £255m fall in Mitie’s secured order book was also disappointing. The firm did report a “significant increase in pipeline,” but I’ll remain cautious of putting too much confidence in that until I see further conversion to committed orders.

Not yet

The dividend was held at 1.33p per share, as per policy, but the statement that “we expect to hold the dividend flat at least until the completion of the transformation programme” might disappoint potential investors. Analysts were only suggesting a 2.5% lift for the full year, but it sounds like that’s on hold now.

Mitie has been making judicious disposals and is focusing on its core strengths and cost efficiency, with chief executive Phil Bentley saying: “We see improving prospects for growth ahead of us.”

The shares are on a very low forward P/E of 8.5 for the full year, but net debt of £186.7m takes the edge off that a bit. Mitie could well be a recovery bargain now, but in today’s tough market I’d need firmer evidence.

With this being the case, I believe the best strategy is to combine both income and growth stocks in your portfolio, to get the best of both worlds.

FTSE 100 income champion 3i Group (LSE: III) and Redcentric (LSE: RCN) could be perfect picks for this strategy.

Small-cap profits 

3i is an investment business, specialising in private equity. Over the years, the company has achieved outstanding returns for investors with the shares gaining 184%, excluding dividends, since 2013. Over the same period, the FTSE 100 has produced a total return of only 17%, once again excluding dividends.

And when it comes to dividends, 3i stands out. Over the past five years, the firm has increased its per share distribution from 8.1p to 26.5p, a compound annual growth rate of 26.8%. At the time of writing, the shares support the dividend yield of 3.2%.

As my Foolish colleague Kevin Godbold recently pointed out, one of 3i’s most attractive qualities is its exposure to small businesses. The company invests in smaller firms, which it identifies as having significant potential. Management helps these firms access capital and new markets and when the business has matured, it sells out, hopefully with a substantial profit.

This approach enables investors to profit from the growth of smaller companies without having to take on the additional risk that usually comes with investing in this space. 

3i is also able to invest in countries and businesses that the average investor would be unable to access. For example, at the end of March, the company sold its stake in ferry operator Scandlines, which operates ferry routes between Germany and Denmark, booking a total profit of €347m. 

Better than expected

As 3i continues with its process of buying, building and selling, I believe shareholders should continue to reap the benefits. To complement 3i’s income, Redcentric could give your portfolio the growth boost it needs. 

After several years of disruption, the IT services business is expected to return to growth this year. City analysts have pencilled in normalised earnings per share growth of 536% to 5.1p (from 0.8p), and an increase of 17% is expected for 2019.

According to a trading statement issued by the business today, the company is well on the way to hitting these targets. Meanwhile, debt reduction is running ahead of plan. Management reports that net debt at the end of March was £27.7m, “better than the board’s expectations.“

While a consequent forward P/E ratio of 15.6 times may not be compelling on paper, I reckon the prospect of additional electrifying earnings growth in the year ahead makes the business exceptional value at current prices. Especially considering the fact that 87% of the company’s revenue is recurring in nature.

And latest production data from the Energy Information Administration this week has done little to soothe my concerns. These showed production in the US hit 9.95m barrels per day in September, the highest level since July 2015. Exports of 1.98m barrels per day was the highest total on record.

Rig count numbers from Baker Hughes suggest that these levels could well keep on climbing too. The information gatherer announced that the number of oil rigs operating Stateside rose by six in the last reporting week, to 750, underlining how comfortable shale producers still are in operating at current price levels.

In the meantime, OPEC and Russia continue beavering away to address the glut, and so far talk is positive that the group’s current supply agreement could be extended into 2018 at next month’s meeting. But the oil cartel is clearly no longer the only game in town, and this threatens to keep crude prices depressed.

Risky business

So what does this mean for Tullow Oil? Well, plenty, as one would naturally expect. Indeed, the FTSE 250 driller suffered impairments to the tune of $642m between January and July, resulting in a pre-tax operating loss of $300m, as it chopped down its own price forecasts.

Of course, the prospect of energy prices also looms large over the company’s ability to pay down its colossal debt pile, which rang in at $3.8bn as of June, even if Tullow Oil continues to scale back capital expenditure and embark on further cost-cutting.

And although production has started gushing from Tullow Oil’s TEN project off the coast of Ghana, brokers are continuing to slash their profits forecasts for the business. It is now expected to endure another full-year loss in 2017, of 0.7 US cents per share, while anticipated earnings of 12.5 for 2018 are also down from prior estimates.

Bet on red

While I reckon those investing in Tullow Oil may be playing with fire, I cannot say the same for those currently splashing the cash on Redcentric (LSE: RCN).

Trading at the IT services provider has been pretty difficult over the past year, but it continues to boast a healthy sales pipeline for both new and existing customers. And in a reassuring update on Thursday it announced trading during the six months to September remains in line with expectations. Meanwhile, the appointment of telecoms exec Chris Jagusz as chief executive today places the North Yorkshire business in pretty safe hands, in my opinion.

And earnings forecasts are certainly a lot sunnier over at Redcentric than at Tullow Oil. The number crunchers expect the bottom line to swell 10% in the year to March 2018, and by a further 17% in fiscal 2019.

While a consequent forward P/E ratio of 16.6 times may not be compelling on paper, I reckon the prospect of additional electrifying earnings growth in the year ahead makes the business exceptional value at current prices.