Join our community of smart investors

Can these three shares thrive after the storm?

Underlying business drivers are crucial to sustainable returns
Can these three shares thrive after the storm?
  • Assessing a mixed picture for Lloyd's banking group
  • Self storage is an industry that still offers decent prospects
  • Factors that have led to a spike in used car demand may not endure

This week we are looking at three companies flagged by our growth at a reasonable price (GARP) screen. While some share prices look attractive next to powerful short-term profit drivers, they are no longer special situations as they were a year ago. Two of the companies have enjoyed share price momentum but more on the back of a correction after an earlier coronavirus market sell-off.  One of our stocks, however, has core growth credentials. The key is to distinguish genuine growth at a reasonable price from short-term spikes and momentum.

Pendragon (PDG)  – New car supply remains constricted with semiconductor shortages and car plants on short-time so buyers have switched to the used car market. Demand has hit limited supply leading to used car prices rising (on average by just over 30 per cent through 2021). This is a surge tide and once new car supply improves prices will drop. The shares may look cheap, priced at 8 times post-surge  earnings per share, but car retailers are a perma-cheap sector due to a low quality of earnings plus market share erosion by auto-tech players. 

Lloyds Banking Group (LLOY) – rising interest rates are usually good news for banks but as primarily a mortgage lender, with borrowers mainly on fixed rates, benefits for Lloyds will be deferred. Meanwhile rising staff costs and lower provision releases mean that a bumper 2021 will not be repeated and earnings per share (EPS) are forecast to drop by a quarter in 2022. That said, Lloyds is now beating its cost of capital meaning the discount to book value can shorten plus good cash flow and excess capital should drive healthy dividends and buybacks for at least three years: these alone should provide total shareholder return of at least 7 per cent per annum. 

Lok’n Store (LOK) – self-storage is expanding rapidly, and has proven itself to be very robust throughout the epidemic. Growth is expected to continue, driven by population and housing market dynamics plus investment to expand LOK’s rentable space by more than one third by 2024. Unusually for REITs, this sub-sector is valued on earnings (others are based on NAV), which has been running at a remarkably steady 25x since 2017, but the peer group has recently broken above this. If EPS can reach 42p for FY2024 (up 50 per cent on 2021), this stock could be worth 1200p today with growth capable of continuing well beyond 2024.

Download PDF