[Just beginning your investing journey? Check out our guide on how to start investing in the UK.]

Prudential

What it does: Prudential is a life insurance and asset management company operating solely in Asia and Africa.

By Andrew Mackie: Following the spin-off of its UK and US businesses, Prudential (LSE: PRU) is now focused entirely on some of the world’s fastest growing markets. This makes complete sense when one considers its growth drivers. Across Asia, for example, despite rising levels of prosperity, insurance penetration is still extremely low. This market is estimated to be worth $1.8trn.

What I particularly like about Prudential is that it is diversified across geography, channel and product. Not only does this provide it with multiple sources of growth but also adds resilience to its business performance. Its distribution network encompasses over 500,000 licensed agents as well as through partnerships with banks (known as bancassurance).

Prudential’s share price has come under severe pressure throughout 2022. It is down 30% year to date. This has been primarily driven by the ongoing closure of the border between Hong Kong and Mainland China. This has hit revenues in its largest market. However, when one considers the explosive growth potential across several of the regions it operates in, today’s depressed share price offers investors an attractive entry point.

Andrew Mackie owns shares in Prudential.

Games Workshop

What it does: Games Workshop designs, manufactures, and sells fantasy miniatures for its Warhammer tabletop gaming experience.

By Zaven Boyrazian. Games Workshop (LSE:GAW) is arguably one of the world’s most recognised tabletop gaming companies. This is the group behind the immensely popular Warhammer franchises, generating the bulk of its revenue through selling miniatures to hobbyists through its global network of retail partners.

Over the last 12 months, the share price hasn’t been the best performer, dropping by over 40%. It seems investors are growing increasingly pessimistic about the short-term performance of this consumer discretionary business. And the latest trading update did show some shrinkage in profits, as consumer spending takes a hit from the cost-of-living crisis.

However, this drag on earnings ultimately stems from a short-term problem. And with the group’s long-term strategy still intact, backed up by an impressive cash war chest of £71m, I can’t help but see the recent share-price drop as a buying opportunity for my portfolio.

Zaven Boyrazian does not own shares in Games Workshop.

Smurfit Kappa Group 

What it does: Smurfit Kappa manufactures packaging products for e-tailers, supermarkets, consumers and industrial customers. 

By Royston Wild. A slew of positive trading updates from the packaging sector would encourage me to buy Smurfit Kappa Group (LSE: SKG) shares for November. 

The FTSE 100 business released financials of its own on Wednesday, 2 November. I think this could help it to record further healthy share-price gains across the month, and beyond. 

Industry rival Mondi reported a 55% rise in underlying EBITDA in the third quarter, it reported in October. It commented that “higher average selling prices and overall volume growth more than offset significant cost pressures.” 

Shortly before this, DS Smith announced that it expected “very strong” revenues growth in the six months to October. Trading was so strong in fact that the firm lifted its half-year profits forecasts. 

Smurfit Kappa’s cheap share price certainly leaves scope for fresh gains if its own financials impress. The packaging powerhouse trades on a forward price-to-earnings (P/E) ratio of just 7 times. 

Royston Wild own shares in DS Smith. 

AstraZeneca

What it does: AstraZeneca is a biopharmaceutical company that develops medicines used by millions of patients worldwide.

By Charlie Carman. AstraZeneca (LSE: AZN) has been a top FTSE 100 performer for a decade. An anticipated return to pre-Covid levels of cancer diagnostics should boost sales for the healthcare heavyweight’s range of oncology products, including Tagrisso, Lynparza, and Imfinzi.

Indeed, AstraZeneca is well positioned for an ongoing transformation in global demographics. Demand for pharmaceuticals to treat chronic diseases continues to rise, and the World Health Organisation predicts one in six people will be aged over 60 by 2030.

Disappointingly, the business suffered a recent setback in a trial for a nasal spray version of its Covid-19 vaccine. Initial testing revealed it didn’t provide adequate protection in humans. However, there’s more to the company’s drugs portfolio than coronavirus treatments, and I think growth prospects look bright elsewhere.

AstraZeneca’s share price has fallen nearly 15% since reaching a 52-week high in August. I believe this presents an attractive buying opportunity to increase the position in my shares.

Charlie Carman owns shares in AstraZeneca. 

Persimmon

What it does: Persimmon builds houses. And when prices are right, it builds up its land bank to build even more houses on.

By Alan Oscroft. The long-term argument for investing in Persimmon (LSE: PSN) is, I think, straightforward. The UK is in the grip of a chronic housing shortage. And our listed housebuilders enjoy strong barriers to entry.

The short-term argument against buying now is the economy, and the growing fears of house price weakness. After all, the Persimmon share price has fallen 50% over the past 12 months, and we don’t want any of that, do we?

Well, actually, I remember the previous housebuilder slump, and I noticed Persimmon was buying up building land when it was cheap. And after that, the shares entered a long and strong bull run. So what’s happening now? Persimmon has been buying up land again.

But the bottom line for me is a P/E ratio of only about five, and a 19% forecast dividend yield. The short-term risks are real, but I think Persimmon is oversold.

Alan Oscroft owns Persimmon shares.

Renishaw

What it does: Renishaw designs and manufactures high-precision measuring equipment and healthcare technology.

By Stephen Wright. I’ve gone for FTSE 250 stock Renishaw (LSE:RSW) as my best British shares to buy in November. This is a business that’s growing, is well protected, and has a strong balance sheet.

Renishaw makes specialist equipment, which it sells to various end markets, including agriculture, healthcare, and power generation. The company has over 1,800 patents protecting its products. 

The company’s balance sheet also looks sound to me. Renishaw has £16.25m in total debt and £141m in cash, which means that I don’t think it’s in much danger with interest rates rising.

Earnings have been growing at an average of 6% annually over the last decade. But the stock has fallen by almost 30% since the start of the year and is now trading at a P/E ratio of 21. 

Stephen Wright does not own shares in Renishaw.

Taylor Wimpey

What it does: Taylor Wimpey is one of the UK’s largest housebuilders, selling homes to private customers and local housing associations

By Paul Summers. The share prices of UK housebuilders have come under serious pressure in 2022 over concerns that rapidly rising interest rates and a protracted recession will dampen demand. Taylor Wimpey (LSE: TW) has been one of the biggest casualties, losing half its value since the beginning of the year.

This may be an opportunity for long-term-focused Fools like me. The FTSE 100 firm is clearly in far better financial health than it was during the Great Financial Crisis. And while dividends can’t be guaranteed, the 10% yield also looks more secure than the payouts on offer from Taylor Wimpey’s rivals. 

CEO Jennie Daly’s comments on the company’s outlook will be closely scrutinised when it releases a trading update early in November. With a P/E of just five, however, I suspect a lot of fear is already priced in. 

Paul Summers has no position in Taylor Wimpey.

Legal & General

What it does: Legal & General is a British multinational company that provides insurance, savings and investment products.

By Nathan Marks. I’m looking to Legal & General (LSE:LGEN) for my top British shares to buy for November. As one of the UK’s largest pension funds, it’s been grappling with the recent chaos in the bond market.

The Bank of England took emergency intervention in early October. That was to mitigate a material risk to the financial stability of the types of services that Legal & General provides. However, the company said that this episode had a “limited economic impact” on its businesses and still expected a full-year operating profit of 8%.

Market volatility could still worsen, causing further uncertainty in the company’s balance sheet and liquidity. However, the stock looks great all-round value and I think it’s been oversold. Today it trades at a P/E ratio of 6.8 and yields a very attractive 8.2% dividend.

It’s hard for me to ignore this strong business with historically robust demand for its products and services.

Nathan Marks has no position in Legal & General.

International Airlines Group

What it does: International Airlines Group is an Anglo-Spanish multinational group that is host to renowned airlines such as British Airways, Iberia, Aer Lingus, Level, and Vueling.

By John Choong. Despite a potential recession on the cards, travel demand still remains robust. As such, I think International Airlines Group (LSE:IAG) shares look lucrative at their current price.

In its most recent trading update, the firm disclosed that demand for travel remains strong and is still recovering to 2019 levels. There also seems to be an uptick in business and upper-class travel, which was echoed by its American competitors. CEOs are of the opinion that consumers are still spending despite inflationary pressures, just less on goods but more on services. Therefore, IAG is expected to benefit as the holiday season approaches.

Nonetheless, it’s worth noting that IAG’s high debt-to-equity ratio (107%) isn’t ideal in a high interest rate environment, and is something investors should definitely take note of. The group will have to hope that its free cash flow continues to remain robust through an economic slowdown in the medium term, or risks damaging its bottom line and sending its share price back down.

John Choong has no position in IAG.

Precision technology

So what is Renishaw and what does it do? It designs, develops and delivers solutions and systems that provide precision, control and measurement tools. Renishaw’s tools are used in a multitude of industries including healthcare, transport, electronics and agriculture.

What’s the current state of play with the Renishaw share price then? Well, as I write, the shares are trading for 3,864p. At this time last year, the shares were trading for 5,550p, which is a 30% drop over a 12-month period.

I do believe macroeconomic headwinds and the geopolitical issues in Ukraine, which caused the stock market correction, have pushed down Renishaw and many other FTSE 250 stocks.

To buy or not to buy?

So what are the pros and cons of me buying this stock?

FOR: The first pro of Renishaw shares I found was its performance track record (I do understand past performance is not a guarantee of the future, however). Looking back, I can see it has recorded consistent revenue and profit in the past four years. A tough 2020, caused by the pandemic, was offset by a return to revenue and profit growth in 2021 FY results. Coming up to date, Renishaw released a trading update released in May covered the nine months ended 31 March 2022. Revenue and profit have increased substantially compared to the same period last year and should underpin further full-year growth when these results are released later this year.

AGAINST: At current levels, the valuation of Renishaw looks a tad high for my liking. The shares are currently on a price-to-earnings ratio of 22. This is after they have fallen 30% in a 12-month period. Perhaps they were overvalued previously — maybe they still are? The results for FY22 would help me paint a better picture around valuation depending on how the shares react.

FOR: Renishaw shares pay a dividend that could boost my passive income stream. Dividends are underpinned by performance, which looks be heading in an upward trajectory based on recent results. It is worth noting that dividends can be cancelled at any time, however. A dividend yield of just under 2% is on offer currently, and this is in line with the FTSE 250 average.

AGAINST: Renishaw is an international business with more than 79 offices in 37 countries and over 5,000 employees. This profile and presence is usually a positive. My concern here is the impact of the pandemic and Renishaw’s exposure. When the pandemic struck in 2020, Renishaw saw performance and returns dip. In several parts of the world, restrictions may come back into force to curb rising infection levels. This could have an impact on performance and returns.

A FTSE 250 stock I’m keeping on my watch list for now

For now I will keep a keen eye on developments when it comes to Renishaw. I am keen to view full-year results later in the year, as well as understand ongoing macroeconomic and pandemic-related challenges it faces and how it plans to mitigate these.

For Renishaw, impressive gains in the first quarter did the trick. The company, which describes itself as a “global provider of manufacturing technologies, analytical instruments and medical devices“, posted a 35% rise in revenue. Total revenue reached £157.8m, with the bulk of that coming from its manufacturing technologies business.

The firm’s smaller analytical instruments and medical devices business only accounted for £9.3m in revenue. But that represented a 63% jump over the same period in 2020.

Renishaw reported adjusted profit before tax of £41.7m for the quarter, more than double the £18.3m recorded a year previously. That’s just one quarter, though, and last year’s adjusted figure looked a bit low to me. Still, it’s impressive, and I’m not surprised to see the Renishaw share price climb in response.

At 30 September, the company had net cash and bank deposits of £234.8m, so there’s a healthy cash position here. But would I buy?

Renishaw share price valuation

Before I checked Renishaw’s price-to-earnings ratio, I expected something high. And based on last year’s earnings per share, the current Renishaw share price represents a multiple of 39. That’s after the shares have fallen 13% in the past 12 months, and I can’t help thinking there was a bit of overvaluation a year ago.

The company had a tough year in 2020, so this is something of a recovery situation too. I don’t know enough about Renishaw right now to decide whether to buy. I will wait until I see how the first half works out, with interim results due in February.

Second biggest climber

What’s so good about Vivo Energy’s Q3 update that it has sent the stock up 4.5%? In this case, we’re looking at a company that’s a fair bit easier to understand. Vivo Energy sells Shell-branded fuels and lubricants in 23 African countries. Its business includes aviation and marine fuel, and it runs more than 2,300 service stations.

The quarter brought in a 3% rise in volumes, with a 4% increase in gross cash profit. Over a nine-month period, volumes increased by 7% while gross cash profit rose by 19%. As well as the higher volumes, the rise in profit is also due to improving margins. Moving into the fourth quarter, Viva says it is “beginning to see improvements in the Aviation and Marine segment“.

The company beat its targets by opening 114 new sites over the nine months, ahead of previous expectations in the range of 90-110 sites. It now expects to have opened 130-140 new sites by the end of the year.

Valuation again

This all sounds good, and I can understand the share price rise in response. But I’m back to the same question again, of whether I should buy. Again, it comes down to valuation. This time, it’s tricky, as 2020 was a poor year with some damage from Covid-19.

Going on 2019 EPS, the current Vivo price gives us a P/E of 13.5. If earnings should come in ahead this year, that could be an attractive valuation. Vivo Energy shares are up 39% over the past 12 months, but they’re still down 12% over two years.

I think there could be more to come here, but I’ll wait for full-year results.

But that is just one in a series of drops that meteorology and healthcare stock Renishaw (LSE: RSW) has seen in the past two weeks. Since the last week of April, in total it has seen a 13% drop, however, in a year it’s risen from 3,776p to 5,645p as I write.

Why is the Renishaw share price crashing?

This drop follows complications regarding the company’s potential sell-off. It had put itself up for sale and mid-April was the deadline for potential buyers to express their interest. However, the response to the otherwise financially healthy company has been lukewarm. 

According to a Bloomberg report, the company’s high valuations are responsible for this. According to the Financial Times the company’s 12-months trailing price-to-earnings (P/E) ratio is at a high 97 times. Its forward earnings ratio is also slated at 51 times.

To me, this suggests that Renishaw’s sale may or may not go through. If it does not, would I consider buying the share or not based on its merits?

How has it performed?

In terms of financials, it is in a strong place. In its trading statement for the nine months ending March 31, the company reported 4% increase in revenue. Much of Renishaw’s revenues are derived from meteorology, which provides products like probe systems and performance testing products, among others. 

Its healthcare segment is growing fast too, with an 18% increase from last year. The segment includes dental products and precision engineering solutions for treatment of central nervous system diseases. 

Renishaw’s profits also came in very strong, with an increase in statutory pre-tax profits of 440% to £106mn for the year to date. 

The combination of investors’ heightened interest in relatively safe stocks over much of the past year, and its own performance reflects in its share price too. Even after the latest decline, it is presently trading near all-time highs. On the other hand, the share price has still more than doubled since the plunge seen during last year’s stock market crash. 

I like Renishaw stock, going by the fact that it is a highly specialised company and is performing well. 

What can happen next

At the same time, for me buying shares in a company that is up for sale is a gamble. This is especially so for Renishaw at present, where valuations are a concern. If I buy the stock at today’s price, and it decides to sell itself at a lower valuation, that leaves me with a loss. 

On the other hand, if the sale does not go through, and its share price keeps rising, I miss out on a great buying opportunity. 

What I’d do about the FTSE 100 stock now

Right now, I think that the risk in buying it is higher than the potential return, especially at its elevated share price. So I will now watch this FTSE 100 stock for developments and buy it only if they look favourable. 

In fact, while most FTSE 250 companies have seen their share prices struggle over the last 12 months, the Renishaw share price has seen impressive growth. The shares are worth more than double what they were this time last year, rising 102% to today’s price of 6,485p.

But what exactly is Renishaw and what does the company do? The company is not the most well-known among the FTSE 250 despite significant profit and market capitalisation growth in the last few years.

What type of business is Renishaw?

According to the company’s website, Renishaw is a “global, high precision metrology and healthcare technology group”.

Among the company’s innovative product list is precision measurement systems which help manufacturers maximise production output. In a nutshell, Renishaw’s technology helps businesses to automate their production lines.

Renishaw has also been able to apply its technology to the healthcare and science sectors. It has also pioneered a new metal 3D printing innovation.

The business has seen soaring profits in recent times. In its most recent earnings report, Renishaw said its adjusted profit before tax for the six months ended 31 December came in at £43.4m, up from £14.3m in the previous year.

The company said the improved profitability came as a result of its implementation of its ‘Fit for the Future’ strategy, which helped drive productivity and reduce costs.

Why is the Renishaw share price rising?

Renishaw announced on Tuesday it would be putting itself up for sale. Founders Sir David McMurtry and John Deer want to sell their 53% stake in the business.

Both men are in their 80s and in a statement said: “Our thoughts have increasingly turned to considering the future of our shareholdings in the company and how we can actively contribute to securing the future success of the business”.

The board has opened the sale process, but no buyers have initially been indicated. The market clearly responded well to the news, however. The shares shot to the top of the FTSE 250 risers on the day.

With a strong history of profitability and share price growth, many might see the Renishaw share price as a safe investment.

The company is a global leader in its field and operates with huge profit margins. Its founders met while employees at Rolls-Royce, and have strived to ensure Renishaw’s reputation for quality and good management.

With all that said, I still have my doubts about potential returns from buying Renishaw shares right now. Little is known about who may potentially buy the company at this stage and what direction those owners will take Renishaw.

The shares have traditionally been seen by investors as an expensive purchase. Based on its current share price, the shares trade on a current price-to-earnings ratio (P/E) of 135. Tuesday’s bounce may have skewed that figure, but it’s too expensive for me to consider buying the shares today.

I’ll be keeping an eye on the Renishaw share price over the next few months as the sale progresses though, and may revisit in the near future.

Of course, this isn’t guaranteed. Some companies that have thrived over the past year may struggle going forward. Nonetheless, I think adding these shares to my portfolio in 2021 could be a good idea. 

Shares to buy today 

B&M European Value Retail (LSE: BME) was able to capitalise on the pandemic and attract customers into its stores. The firm benefitted from ‘essential retailer’ status, which meant it could stay open as some competitors were forced to shut. 

This was a one-off benefit for the discount retailer. So, it’s unlikely B&M will benefit from the same tailwind as we advance. 

However, the group has been using its pandemic profits to grow its store estate. Thanks to this investment, analysts reckon the firm’s sales could hit £4.7bn in 2022, up from £3.8bn in 2020. 

These are just projections. There’s no guarantee the firm will hit these targets. What’s more, there’s no guarantee rising sales will translate into a higher share price. The company faces multiple risks, including higher wages and purchase costs. 

Still, I think B&M is a well-run business. That’s why I reckon it’s one of the best UK shares to buy today and would acquire it for my portfolio. 

Industrial engineering

Industrial engineering group Renishaw (LSE: RSW) operates under the radar of most investors. The company manufactures products for the healthcare and meteorology sectors. These tend to be highly engineered products and experienced clients. 

Renishaw is incredibly good at what it does, suggesting the organisation has a strong competitive advantage. Clients return to the business year after year, placing new orders and helping the company grow. 

Unfortunately, growth took a step back last year. The pandemic hit profits and this factor, coupled with other issues, caused Renishaw’s net income to evaporate. The company’s biggest challenge now is the risk of a prolonged economic slowdown. This could have a significant impact on both its top and bottom line. 

Still, the reason why I think this is one of the best UK shares to buy today is the fact Renishaw is already recovering from last year’s setbacks. I’d buy the stock today in anticipation of a further improvement in trading. 

Technical enterprise

Diploma (LSE: DPLM) is very similar to Renishaw in the way that the company provides products and services for the business-to-business market, which consumers may not necessarily recognise. The pandemic impacted it, but profits are expected to rebound rapidly this year. Analysts have pencilled in growth of 60%.

This growth is by no means guaranteed. It’s only a projection at this point, and there’s still plenty that could go wrong for the company over the next 12 months. So, investors shouldn’t rely on this projection for investment decisions. 

That said, I think these estimates show the company’s potential, and I’m comfortable with the level of risk investing based on projections entails. That’s why I’d buy the stock for my portfolio today. I believe Diploma will report strong earnings growth in 2021 and beyond as the business builds on its customer base.

Three cheap UK stocks

Howden Joinery Group (LSE: HWDN) is one of the most successful UK corporations. Its success lies in rewarding individual store managers, who get to keep a portion of their profits. This means that while the company might face some decline in revenue in the near term, employees are highly incentivised to drive growth over the long run.

That’s why I think this could be one of the best cheap UK shares to buy. Howden has a strong brand, a loyal customer base and incentivised employees. These factors could help the company ride the UK’s economic recovery over the next few years.

City analysts are expecting earnings per share to fall by around 50% this year before rebounding in 2021.

Despite this, and the company’s obvious competitive advantages, the stock continues to trade around 15% below the level at which it began the year. As such, it could be worth buying Howden as part of a basket of cheap UK stocks while it offers a margin of safety.

Renishaw

As cheap UK stocks go, I think Renishaw (LSE: RSW) stands out. 

This highly specialised and unique business provides industrial automation and motion systems for the engineering and healthcare sectors.

It’s a world leader in automated manufacturing systems, which gives the company a strong competitive advantage around the world.

Demand for Renishaw technology has exploded this year. Analysts are forecasting earnings growth of nearly 200%. Companies have rushed to automate their systems as coronavirus has impacted workforces around the world. I think this could give Renishaw years of revenue growth.

Therefore, despite the company’s premium valuation, from a long-term perspective, I think the business qualifies as one of the best cheap UK stocks.

It is currently dealing at a forward price-to-earnings (P/E) ratio of nearly 40, but there are only a handful of other companies that operate in the sector.

I think it is worth paying a premium for this business.

Bellway

Bellway (LSE: BWY) is set to benefit from the UK’s structurally undersupplied housing market in the years ahead. Despite this potential, investor sentiment towards the homebuilder is weak.

The stock is currently dealing at a forward P/E of 9.

I think this valuation deeply undervalues the company. For example, the rest of the housebuilding sector is trading at a P/E of 12. As such, I think the stock offers a wide margin of safety at current levels and qualifies as one of the best cheap UK stocks to buy now.

Bellway has also returned a healthy amount of cash to investors in the past through dividends. To conserve some money, the company has reduced its dividend this year, but I expect management to increase the payout next year when business returns to normal.

If the dividend is resumed at 2018 levels, investors can look forward to a 6.3% dividend yield on the current stock price.

FTSE 250 firm Renishaw (LSE: RSW), which specialises in precision measuring equipment, is in such a slow spell now. The shares soared to around £58 in January 2019, then reached a similar level again six months later.

But then the rot set in, and despite a positive start to 2020, Renishaw shares are still more than 25% down on their previous peak. There are signs of at least some share price stabilisation, which suggests we might be seeing a buying opportunity.

But the problem is, earnings are falling as demand for the firm’s products has been slipping. Earnings per share fell 30% in the 2018–19 year, and there’s a similar drop expected for 2019–20.

First half

First-half figures Thursday emphasised the fall in demand from Asia Pacific countries, with revenue down 20%. But revenue slipped worldwide too, down 14% overall to £259.4m at constant exchange rates.

The bottom line shows a big dip in adjusted pre-tax profit, to £14.3m from £59.6m at the same stage in 2018. Adjusted EPS also fell, from 69.3p to 15.1p. But the interim dividend was maintained at 14p per share, with cash of £71.3m on the books.

I see Renishaw as a leader in its field, making high-quality products with strong margins. It wins on cash flow for me too, and I do think the current downturn is transitory.

But right now, on a forward price-to-earnings ratio of over 50 and with earnings that I think might come in well below forecasts, it’s too rich. I think there could be significantly better, and safer, buying opportunities in the future.

Growth return

After a couple of years of falls, analysts are expecting earnings at 3i Group (LSE: III) to return to growth. That’s not until 2021, mind, and they have the year to March 2020 flat.

Dividends have held up and look set to yield around 3.5%, covered more than three times by earnings. We’re looking at a P/E of under nine, and dropping. So why is the FTSE 100 growth prospect so apparently undervalued?

Well, 3i is a private equity and venture capital firm, and P/E is not as meaningful a measure for such an operator. It’s perhaps more helpful to look at net asset value, which stood at 877p per share at 30 September. That’s despite a hit from the strengthening of sterling, making the company look more attractive to me.

Attractive

With the shares trading at 1,110p, it indicates a price to book value of 1.27, which I don’t see as stretching.

During the third quarter, 3i’s private equity arm generated cash proceeds of £189m through several divestments. It also “signed the disposal of Aspen Pumps at an overall money multiple of 4.1x and a 34% IRR.“

The company also spoke of “the highly accretive sale of Wireless Infrastructure Group out of 3i Infrastructure plc and further rail investment in North America.”

3i is, admittedly, a trickier company than many to value. And profits could be more erratic due to the long-term timing of investments and disposals. But I’m seeing a significant long-term growth opportunity, and a cash cow on the dividend front.

Still too dear?

When it comes to identifying great businesses, high-precision metrology and healthcare technology firm Renishaw (LSE: RSW) has regularly ticked a lot of the necessary boxes: high returns on capital employed, fat operating margins, a global leader in what it does with an experienced management.

Despite this, the company’s share price has certainly struggled of late, falling almost 40% in value from the highs hit back in January 2018 by the end of trading yesterday. 

Today’s trading update for the three months to the end of September hasn’t helped matters. Indeed, the stock was down another 12% as markets opened. So what’s going on?  

Put simply, Renishaw is continuing to feel the effects of reduced demand for its equipment. Revenue over the period was £124.6m — 19% lower than the £154m achieved over the same quarter in 2018. While last year’s number was helped by a few large orders from manufacturers in the Asia-Pacific region, this is still a significant drop. Pre-tax profit also fell a shocking 85%, from £33.5m over Q1 2018 to just £5.1m this time around.  

To make matters worse, there’s little sign of this malaise ending soon with the company reiterating its view that trading would “remain challenging” for the rest of the current financial year due to the uncertain economic conditions. All perfectly reasonable, of course, but not what its investors want to hear.

Renishaw’s stock was trading on almost 26 times forecast earnings before this morning. That’s punchy, even for such a quality outfit that still has net cash on its balance sheet (£98.5m), in addition to all its other attributes.

While a resolution to Brexit could see a brief recovery in many second-tier stocks, I’m not inclined to get involved just yet given this is still higher than its five-year average P/E of 23. One to come back to in 2020, I feel. 

Far more upbeat

Despite bearing similar hallmarks of quality (e.g. consistently high ROCE), shares in recruitment specialist Hays (LSE: HAS) — like those of Renishaw — have been under pressure for a while now. Go back a little over a year and the business was valued 46% more than it was at the close of play yesterday. By contrast to its index peer, however, today’s Q1 update was far more positive.

While group net fees fell by roughly 1% over the period — again blamed on “difficult economic conditions and tough growth comparatives” — 10 countries grew quarterly fees by over 10% and eight “still delivered all-time records“. Far from being gloomy on its outlook, CEO Alistair Cox also said he was confident the company’s strong market positions and finances (£90m in net cash) would allow the company to negotiate these tricky times while also investing for the future. Cue a 6% jump in the share price.

Shares were trading on 13 times forecast earnings earlier today — not unreasonable compared to its peer group and less than its average five-year P/E of 16. The 4.2% dividend yield might also be adequate compensation for some while they await a recovery.

I’d say that’s still unlikely for now. That’s why I continue to like meat processor and FTSE 250 business Cranswick (LSE: CWK), even if its share price has been rather volatile since last October following years of solid gains.

Does the positive reaction to today’s full-year results indicate that now might be a good time to buy in? I’m inclined to think so. 

Big investment

Statutory pre-tax profit for the year to the end of March came in at £86.5m — a slight reduction on the £88m achieved in 2017/18. At £1.44bn, revenue was pretty much flat. 

As CEO Adam Couch commented, however, these numbers were achieved “against a backdrop of highly competitive market conditions and ongoing, Brexit-related, political and economic uncertainty” and following “three years of very strong growth”.  

Despite the slight drop in profit, there’s still much for prospective investors to like.

For one, like-for-like volumes of pork exported to Asia jumped 16.1% as a result of African swine fever ravaging China’s pig herds. According to the company, the damage done could last for a number of years. 

Less specifically, Cranswick continues to generate very decent returns on capital employed, a metric regarded by one of the UK’s best fund managers as extremely important. This came in at 18.4% for the last financial year. 

The company continues to boast net cash on its balance sheet, even if the £6.3m announced today is down from the £20.6m last year. The 4.1% increase to the full-year dividend (to 55.9p per share) was also nice to see.

Perhaps most importantly, Cranswick continues to invest in its assets to enable it to expand in the future.

A total of £79m was spent in 2018/19 to “add capacity, extend capability and drive efficiencies”. The firm is currently building a new poultry facility in Suffolk and recently completed a Continental Foods facility in Bury. 

For such a quality company with still-good growth prospects, I think 20 times earnings is a reasonable price to pay. 

One for the long term

Another FTSE 250 stock that I think could be a decent long-term buy is metrology firm Renishaw (LSE: RSW).

That’s despite the fact that its shares — like those of Cranswick — have been unsettled of late due to the company enduring a period of difficult trading and less demand for its products in Asia. 

Clearly, whether Renishaw’s share price changes direction or not will depend on whether conditions improve (not to mention the speed of a resolution to the ongoing trade spat between China and the US). It’s already had to cut guidance on revenue and pre-tax profit twice this year.

Taking this into account, I understand why some investors may want to hold off buying for now. 

That said, Renishaw’s seriously high returns on capital and operating margins shouldn’t be ignored. Nor should its £120.5m net cash position.

As we never tire of saying at the Fool, it’s the quality of a business that matters in the long run, not what the shares do in the near term.

It’s on my watchlist for now.