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Three shares with pockets of hidden value

Are there reasons to adjust perceptions of these growing businesses?
Three shares with pockets of hidden value

Our last Alpha growth at a reasonable price (GARP) stock screen highlighted an eclectic bunch. Of the three companies a fast reinventing green energy provider, a conglomerate and a thread manufacturer. Each offers better than average growth in the near-term, but all have something to give the investor a slight pause and ask if the value proposition looks and feels right. A change in stock perception, differing views of eco-friendliness, worries about reliance on constant acquisition to sustain growth and once crippling legacy issues make the investment case less straightforward but our three featured stocks this week all appear to offer at least some pockets of potential value.

  • SSE (SSE)  – this is the UK’s leading green electricity provider, a great place to be as the war in Ukraine looks set to accelerate the race away from gas powered generation. Committed to a large increase in green investment and happy to sacrifice a large chunk of what was once seen as one of the UK’s most reliable dividend streams, SSE is fast making the transition from almost a bond-proxy stock to one offering an attractive rate of growth. There has been a huge swing upwards in the quality of earnings here with the PE 50 per cent higher and the yield half the value of three years ago when the decision to reinvent the business was taken. The initial surge may be over but as now a growth stock, this is not expensive. 
  • DCC (DCC) – conglomerates were big in the 70s and 80s, but are rare today. DCC operates in four disparate industries, but with a common thread of acting as a distributor rather than principle. DCC has shown steady growth over 20+ years (and 27 years of rising dividends), but has substantially de-rated in the past five years. Today, the group’s earnings rely on acquisitive rather than organic drivers, which can prove harder to sustain as a business grows. There is also a heavy skew towards fossil fuels, albeit largely at the ‘greener’ end of the spectrum. After five years the de-rating could/should be over and with high single-digit growth this stock is on a market average PE and could finally see the end of five years of negative total shareholder return (TSR).
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