- A stock at the right point in its cycle
- Plus a value trap to avoid
Our stocks this week provide great lessons of why one should always be wary of low PEs, what a value trap looks like and how history can often lead to a false impression of future prospects. We look at a small, but diverse building materials stock with a chequered history, but a vastly cleaned-up act and a utility services reseller business with a very different business model. While the former looks potentially interesting (with the caveats that always accompany a cyclical), the latter potentially has a great deal of scope to disappoint as the energy markets begin to normalise.
Alumasc (ALU) – a small, now Aim-listed building products stock that has been through a long and arduous process of rationalisation after a fairly long period of trickier trading could now have turned the corner. While the stock may appear cheap on a price-to-earnings (PE) of just 7.5x, that is not the basis for any interest - as a core cyclical stock and sector, this is the right level. The interest instead comes from moderate earnings per share (EPS) growth driven by exposure to ‘green’ and regulatory trends in construction and an attractive dividend.
Telecom Plus (TEP) – Telecom Plus, operating under the public brand of Utility Warehouse, resells bundled consumer utility services (electric, gas, mobile, broadband, domestic breakdown insurance) on a ‘the more you buy, the more you save’ pricing model. TEP has been a major beneficiary of the turbulence in the domestic energy markets (pricing and business failures) driving customer numbers sharply. However, greater stability and lower energy prices could easily mean that forecasts are too high. While the apparent PE of 12x looks attractive, the ‘real’ PE could be materially higher. While a low PE and a near halving of the share price might have great allure, this stock feels more of a value trap than an outright value play.
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