Three cheap shares awaiting growth catalysts

The three stocks discussed this week have very different dynamics and drivers which in two cases seem to have little to do with the business’ trading performance. A low stock rating is always a good place to start when hunting for value, although many companies are ‘perma-cheap’ stocks due to quality of earnings (specific or industry); above average EPS growth is another obvious draw, but often even that is not enough to propel a share price up. Our stocks this week highlight the need to ‘lift the hood’ and understand the story as well as (perhaps even instead of) just relying on the primary valuation metrics. 

• Renishaw (RSW)  – this is the best-in-class in the field of metrology (the science of technology of high precision measure). It is very well regarded and offers double-digit earnings per share (EPS) growth through product innovation and a positive industry backdrop. A slight problem is that RSW behaves more like a private than a public company, owing to its founders owning more than half the stock. However, this creates an interesting dynamic as these founders are looking to sell the business: an aborted sale in 2021 saw the shares speculatively approach £70 (today nearer £40). Another attempt feels inevitable and with the stock trading below the sector average (it deserves a small premium) and a buyer having to pay a premium for control, the shares look cheap. 

• Hays (HAYS) – a leading recruitment and temporary staffing agency, Hays should be reaping the benefits of global changes in working patterns, the return of wage growth and very fast expansion in its largest sector (technology), but the shares are languishing. Poor total shareholder return (TSR) and a low rating relative to EPS growth potential indicate that, despite favourable dynamics, there is something about this stock that the market does not really like. The share price seems to be driven more by macro data on wider industrial market conditions than its own performance and with economic headwinds and a more turbulent labour market ahead, the shares look set to underperform despite sitting on a low rating. 

• Wilmington Publishing (WIL) – this is a provider of market intelligence and training for the fast expanding Governance, Risk Management & Compliance (GRC) sector. There is an increasing burden on businesses, public bodies and standalone professionals to be fully compliant (and able to certify that they are) with all and any pertinent regulations. This is becoming business critical for organisations of all sizes and in all geographies, leading to industry forecasts of 14 per cent compound annual growth rate (CAGR) through to 2030. However, this is not showing in the consensus views for WIL with revenue growth of just 5 per cent in the near-term. The shares have materially derated so far in 2022 but it is hard to see the catalyst for a rebound.