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Forget Purplebricks! I’d rather invest in this profitable and growing small-cap

How frustrating it must be for shareholders seeing the back-peddling being done by Purplebricks Group from its overseas expansion. But rather than investing in such noisy, but profitless were-going-to-change-the-world-type companies, Id rather go for something with a track record of success and profits.

AndMidwich Group (LSE: MIDW) is a good example, despite a lack of progress with the share price since my previous article about the firm in January. The firm operates as a specialist audio and visual (AV) distributor to the trade market in the UK, Ireland, Continental Europe and the Asia Pacific region. I like its strong position in the UK and the acquisitive and organic growth strategy that is helping the firm expand abroad.

A strong position in its markets

Midwich distributes stuff for around 400 vendors, which includes some blue-chiporganisations. Think of things such as large format displays, projectors, digital signage and professional audio. In some cases, the firm is the sole or largest in-country distributor for a number of its vendors in their respective product sets.

The directors reckon the companys cosy position in its markets has arisen because of its technical expertise, extensive product knowledge andstrong customer service. Such things havent occurred overnight but have been built up over a number of years.Meanwhile, the company serves around 17,000 customers, most of which are professional AV integrators and IT resellers serving the corporate, education, retail, residential and hospitality sectors.

In todays trading statement, the company said that in the six months to 30 June it traded well, with revenue growing both organically and via contributions from recent acquisitions. The firm saw revenue growth from all its trading geographies but Continental Europe and the Asia Pacific region performed particularly well. Overall gross profit margins were up a bit too.

Ongoing geographic expansion

Midwich acquired four businesses in the period, which have given the firm a toehold in Italy, Switzerland and Norway as well asstrengthening its capabilities in the audio and lighting segments.Meanwhile, cash generation in the first half came in slightly aheadof the directors expectations.

City analysts following the firm have pencilled in earnings increases for the current year to December and for 2020 averaging around 12% per year, which strikes me as a decent rate of growth. Meanwhile, with the share price close to 565p as I write, the forward-looking price-to-earnings ratio for 2020 hovers between 16 and 17, and the anticipated dividend yield is about 3%.

I admit that this isnt a bargain valuation, but the firm is profitable, growing its earnings and has a vibrant strategy for further expansion. Well get more colour regarding trading in the first six months of the year in the half-year report, which is due on 10 September. With a bit of luck, the company will also update its outlook statement at that time.

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Is this a must-buy small cap stock after 15% share price fall?

Information management software expert IDOX (LSE: IDOX) has been on many a recovery investors radar since its share price crashed in late 2017, after the firms second profit warning in the space of two months.

Despite full-year results a few months later being met reasonably positively, my colleague Roland Head told us he was not completely convinced.

That was a canny analysis, as the shares continued on a lukewarm trajectory, before falling 15% in response to 2019 first-half results on Monday.

The company spoke of a stable financial performance during a period of significant transformation, reporting a small fall in revenue from 31.8m in the same period last year to 31.5m this time. A statutory first-half loss of 32.5m reported a year ago was drastically reduced to just 2.2m, but adjusted EBITDA for continuing operations looked less impressive with a drop from 4.6m to 4.4m.

Net debt looks stable at 25.4m, from 26m, and theres significant headroom within its existing facilities.

Turning around

The trouble is, IDOX is still deeply immersed in a massive restructuring, having taken on new management from board level to senior levels throughout the business. There are disposals and refocusing on key assets going on, together with changes in accounting procedures.

That all adds up to I havent the faintest idea whats going to happen or what the company might be worth if and when it all gets back on track.

And it means that Im sticking to my new rule of recovery investing never buy a recovery stock until after its recovered. I think its particularly appropriate in the current economic climate, when several stocks have been crashing and then going on to do even worse.

REIT crunch

About a year ago, the Capital & Regional (LSE: CAL) real estate investment trust (REIT) was looking positive, as things were progressing well with its development plans at The Mall in Walthamstow.

I generally like REITs as a relatively low-risk way to invest in the property market. If theres one investment field in which I think its wise to go for a collective investment rather than, say, taking on a residential buy-to-let mortgage and shouldering all the risks yourself, this is surely it.

Unfortunately, as I write these words, theres a major fire at the the Walthamstow mall, and the Capital & Regional share price has so far taken an 8% hit. The company has not been able to say much so far, beyond assuring us that it will provide further information once the fire has been extinguished and we have fully assessed the situation.

New strategy

Shares in the trust, which specialises in shopping centres, had already been in a significant slump over the past two years. In full-year results released in March, chief executive Lawrence Hutchings spoke of the structural changes currently under way in the retail sector, stressing the apparent success of the new strategy we launched just over a year ago.

As REITs go, I thought Capital & Regional was oversold and looked like a potential buy and it still might be, as the Walthamstow property is just a part of its portfolio.

And it does help stress the added safety of a REIT imagine the damage a house fire could do to your property investments if youd, well, bought a house.

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Why I would sell the Centrica share price and buy this FTSE 250 growth stock

Specialist global information business Ascential (LSE: ASCL)is up 3% at time of writing after it reported impressive 25% first-half revenue growth to 236.2m, with earnings up 21.1% to 76.7m. This hopefully signals the end to a tough year for the group, which has seen the share price fall almost 20% in 12 months.

On the Ascent

The FTSE 250 company, which has a market cap of 1.57bn, has 39 offices around the world and serves customers in 150 countries. It offers them business-critical intelligence, world-class events and advisory services, to help them overcome commercial challenges and dramatically improve performance. Basically, its a play on the digital economy and todays numbers look promising, including 22.3% growth in adjusted diluted earnings per share (EPS) to 11.5p.

CEO Duncan Painter hailed a strongfirst six months of the year, with considerable progress against key goals, which sets the group on course to meets its medium-term target of double-digit growth. Painter has also been reshaping the group, disposing of its Exhibitions arm, acquiring WARC, BrandView and Flywheel, and reviving the Cannes Lions advertising festival.

Cashing in

Ascential boasts good cash generation, with an operating cash flow conversion rate of 102%, which gives it headroom for continued investment in organic growth and bolt-on acquisitions. In February, Peter Stephenssuggested itoffers good value for money and may be able to deliver a successful turnaround over the long run.

The downside is that it isnt cheap, trading at a forecast 21.1 times earnings. The forward yield is just 1.7%, although cover is strong at 2.8. City analysts are pencilling in EPS growth of 14% this year and 12% next, which looks tempting for investors willing to pay a premium for the groups stronger than average growth prospects.

Cashing out

British Gas owner Centrica (LSE: CNA) is falling today after reports in yesterdays Sunday Times that it is due to cut its dividend once again, and may even offload its gas and oil business as well.

CEO Iain Conn has his work cut out turning this ship around, with its value plunging from14bn to about 5.1bn since his appointment in 2015. Time may be running out as shareholders press for a change, although Centrica isnt the only one of the Big Six power companies to be struggling, shares in SSE are 25% lower than five years ago.

Further to fall?

British Gas lost 742,000 customers last year amid price hikes and intensifying pressure in the home energy sector, while mild weather and low gas prices havent helped. Conns belief that he can revive the business by focusing on initiatives such as its Hivehome devices arm and Local Heroes tradespeople website looks almost delusional.

The Centrica share price is down another 35% this year and the direction of travel has been pretty much unbroken for five years now. Do not put your faith in the published forecast yield of 8.3%, that could be cut by as much as 40%. Its forecast valuation of 11.2 times earnings does not a bargain make. The share price trades at 87p butRoland Head suggests it could be heading for 55p.

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Is FTSE 250 faller Metro Bank about to return to growth?

Coming out of the banking crisis, I thought the so-called challenger banks could offer an attractive alternative investment. Starting from a small size and without the legacy baggage of the big banks, small inroads into the lending market could grow their businesses nicely.

But one downside of being small in a financial business is that when you do get something wrong, it can do disproportionate damage. Thats what happened to Metro Bank (LSE: MTRO) after it was revealed that the bank had mispriced the risk of a chunk of its loans, including some commercial mortgages, forcing it to have to raise more than 350m to shore up its balance sheet.

For a big bank, such a sum would be relatively small change and the market reaction would probably be relatively subdued. But for Metro Bank, the result was a share price collapse. Today were looking at an 85% slump since a peak in March 2018, with Metros market capitalisation down to a little over 800m.

Loan sale

On Monday, however, the Metro share price blipped up 6% after the bank confirmed press speculation that it is in discussions regarding the potential sale of a loan portfolio. Commentators are suggesting the potential purchaser of a mortgage portfolio is hedge fund Cerberus Capital Management, and the deal could be worth around 500m.

That could result in a serious balance sheet improvement and put Metro Bank on a solid footing for a second attempt. But until earnings start growing again, the P/E valuation drops to something sensible, and theres some sign of a dividend on the horizon, Im keeping away.

First-half results are due Wednesday afternoon.

Cheap bank?

Bank of Georgia Group (LSE: BGEO) is on a similar market cap to Metro Bank, but other than that it looks a very different prospect to me. Its share price has been pretty erratic over the past five years, showing an overall loss of 35%.

The effect on the banks valuation has been to push its forward P/E multiple, based on forecasts for the current year, to only around 6.5. Theres a dividend yield on the cards of 5.1%, and that would be covered 3.1 times by forecast earnings.

The current prognosis for 2020 is even better, with a predicted 14% rise in EPS dropping that P/E ratio to under six, and analysts are expecting a 13% hike in the dividend to yield 5.7% (while maintaining 3.1 times cover).

Thats actually a very similar valuation to Lloyds Banking Group, whose shares are slightly more highly valued at a P/E of 7.5, and whose dividend yield is a little better at 6% (though cover by earnings is lower at 2.2 times).

Stronger economy

But other than valuation, Im really not seeing a lot of similarity here. Lloyds shares are surely depressed by the potential economic catastrophe we could face in the UK in the event of a no-deal Brexit (the chances of which will be significantly higher should Boris Johnson take charge of the negotiations).

By contrast, the economy of Georgia is looking strong, with annual economic growth predicted to rise from 4.6% this year to 5% by 2021. Im sure some of the low valuation is due to most Brits being unable to find Georgia on a map (and I only can because Ive looked it up). It looks cheap to me.

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Will this hated FTSE 250 dividend stock roar back in August?

CouldAA Group (LSE: AA) be considered a terrific herd-defying share to buy ahead of fresh financials set for mid-August? Shares in the auto breakdown service have kept on crashing (no pun intended) over the summer, and as I type, the firm is worth less than half of of what it was just 12 months ago.

Optimistic investors would point to its rock bottom forward P/E ratio of 3.4 times as possible reason to take a punt, though, before the release of pre-close trading details scheduled for August 13. AAs chubby corresponding dividend yield of 4.1% may well attract the attention of dividend-hungry investors too.

The small-cap soothed investor nerves last month with advice that it remained well positioned to deliver trading EBITDA growth and strong free cash flow generation in the year to January 2021. A couple of months earlier in April it had taken the hatchet to dividends thanks to a 62% fall in pre-tax profits in fiscal 2020. Another reassuring statement in the days ahead could lead to speculation that its finally steadied the ship and could lead to fresh bouts of buying activity.

Pros and cons

That said, theres a reason why the market has been selling AA despite those rosier financials of recent weeks.

On the plus side the company, which has drawn up new significant partnerships for its roadside services with the likes of Lloyds Banking Group, Jaguar Land Rover and Volkswagen in recent times, continues to add to its list of blue-chip clients and put Admiral in its portfolio several weeks ago as well. The company is hoping that investment in new technology (like its new so-called Smart Breakdown service that detects faults before they happen) will help it to win business with corporate customers and private individuals alike.

But the intense competition in the marketplace continues to haunt AA and its hopes of profits recovery. Membership at the company slipped 2% last year to 3.21m accounts, and theres more than a whiff of expectation that the huge investment it has made in technology of late is stopping customer numbers falling off a cliff and nothing more.

Im not a fan. But you might be

Whether you are talking about phone contracts, bank accounts or pet insurance, citizens are becoming more and more nomadic and increasingly happy to shop around to find the best deal. The breakdown cover market is no different either.

Indeed, a recent report on the industry showed that a whopping four-fifths of those renewing their policy either look for an alternative policy or chat with their existing provider to bring down the cost. Its mighty probable that the numbers are likely to keep creeping up as household budgets across the UK come under ever-increasing pressure, a worrying prospect for providers of premium cover like AA.

I can see why contrarian investors might want to grab a slice of the action right now given the huge investment AA is making to revitalise its businesses. And it is quite possible that its share price could rise on those upcoming financials as well. For my money, though, doubts over the breakdown specialists profits outlook in the near-term and beyond remain too high to justify buying it for right now. Thats why I plan to continue avoiding it.

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Why I feel buying the AstraZeneca share price could destroy your retirement riches

Buying shares in bad businesses may be the most obvious way to lose money in the stock market.

But theres another way of losing money thats almost as dangerous and is often overlooked. Im talking about valuation. Paying too much for a stock can leave you sitting on a loss for years, while the wider market steams ahead.

The two companies Im looking at today are good businesses, but they look too expensive to me.

Pharma buzz

FTSE 100 pharmaceutical firm AstraZeneca (LSE: AZN) may seem an unlikely choice for this article. Surely this company is conservatively valued, produces reliable profits and pays a generous dividend?

Unfortunately, this isnt the case. AZN shares have risen by 47% over the last five years to an all-time high of more than 63, despite falling profits and rising debt.

This has left the group trading on 22.2 times 2019 forecast adjusted earnings, with a dividend yield of 3.5% well below the FTSE 100 average of 4.3%.

In my view, this valuation is pricing in a lot of future progress. Im also concerned that the companys preferred measure of adjusted earnings may be flattering its performance, something my colleague G A Chester covered recently in more detail.

Worse than it looks?

Over the last four years, AstraZenecas net debt has risen from $7.8bn to $16.3bn. I believe one reason for this is the maintenance of the groups $2.80 per share dividend.

You see, the company has paid out about $14bn in cash distributions to shareholders since 2015, but has only reported shareholder profits of $11.5bn.

These numbers tell me that Astra is relying heavily on borrowed cash to fund investments in new medicines, while paying out all of its profits (and more) to shareholders.

The situation reached a new low in March, when Astra decided to raise $3.5bn from shareholders just days after paying a dividend of $2.4bn. This seems ludicrous to me if cash really is that tight, the dividend should be cut.

My verdict: AstraZeneca has an exciting pipeline of new products, but I think the price is far too high, given the groups weak cash generation and steep valuation. Id wait for a better opportunity to buy.

Down 13% as spending climbs

My next stock also operates in the pharmaceutical sector, producing antibodies for research labs. Shares in Abcam (LSE: ABC) have risen from about 140p to 1,221p over the last 10 years, valuing this business at over 2.5bn.

However, the stock is down by more than 14% at the time of writing. Todays fall came after the company announced plans to increase spending on expansion and said its chief financial officer had resigned.


I should explain that Abcam has delivered high profit margins and strong growth for some years. Profits doubled between 2013 and 2018, for example.

However, earnings per share for the year that ended on 30 June are expected to be broadly unchanged from the previous year. Looking ahead, analysts expect modest earnings growth of 7% for the current year.

With spending rising, its not clear to me whether Abcam will be able to maintain its historic operating profit margin of nearly 30%. This risk plus slower growth suggests to me that the stocks forecast price/earnings ratio of 35 is rather high.

As with AstraZeneca, I think this is a good business, but in my view its too expensive at the moment.

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Is this tempting small-cap about to shoot the lights out?

The Tungsten Corp (LSE: TUNG) share price has been flying. Since its nadir in February, the price is up almost 120% and today the shares change hands near 48p.

Thats a decent five-month return for shareholders, but my guess is that many were well down from their original buying prices because the firm has been something of a serial disappointer over the years.

Reducing losses

Given the history of loss-making, I reckon timing a purchase to catch that gain would have been difficult. Yet the share-price action suggests that some investors were buying. Indeed, theres a turnaround under way in the underlying operations.

The firm tells us in its news releases that it aims to be the leading global electronic invoicing and purchase order transactions network. However, despite providing such services for an impressive list of massive customer organisations, it has failed to turn a profit so far.

In todays full-year results report for the trading year to 30 April, we can see that continuing revenue increased by just over 6% compared to the year before, to around 33m. The operating loss came in at 2.6m. Imagine having your own business and you worked hard all year to turnover 33m, only to find at the end of the year you were 2.6m worse off than before you started the years trading thats the harsh reality of loss-making businesses.

An optimist would point out that the operating loss has fallen from 10.5m the year before and is, therefore, heading in the right direction. But the net cash figure on the balance sheet depleted by 55% to 2.6m in the period. In other words, it looks like it cost more than 3m to keep things running. Tungsten is in a race against time before the money runs out, and we could see further capital-raising and shareholder dilution ahead.

A brighter future?

But executive chairman Tony Bromovsky thinks the future looks brighter. He said in the report that the directors have confidence in the Tungsten suite of solutions and offerings.He reckons the business is well positioned, following a period of transformation, to achieve future growth and profitability.

However, I reckon theres a problem for shareholders. The market capitalisation stands at almost 62m, which is near twice the level of revenue reported. Given that the firm appears to work in a low-margin sector, a high, growth valuation seems inappropriate. The advances in revenue are unimpressive to me, and the company has after all, so far, been unable to turn a profit. My guess is that when profits do finally emerge from the enterprise in future periods, the potential reality of their small size could prompt a valuation de-rating, which could see the shares plunge.

Tungsten has been busy cutting costs and restructuring, but we need to see worthwhile and profitable growth kicking in if the stock is to continue its rise. Given the companys long history of struggle, I think thats a tall order, and any annual earnings advances could be modest. So Im avoiding the stock for now because I dont think its about to shoot the lights out and it could move south instead.

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Forget buy-to-let! I’d buy these 2 FTSE 100 dividend growth stocks in an ISA today

With house prices falling in London and the South East, the outlook for the buy-to-let sector is uncertain at present. As such, investors in the sector may be unable to generate the strong capital growth enjoyed in the past, while also seeing their net incomes fall due to tax changes.

As such, investing in FTSE 100 stocks that have solid track records of dividend growth could be a shrewd move. They may offer scope for a high income return, as well as the potential for capital growth. With that in mind, here are two large-cap shares that could become increasingly appealing income opportunities over the long run.

Compass Group

Over the last four years, support services company Compass Group (LSE: CPG) has increased dividends per share by over 9% per annum. It has been able to do so due to its consistently-rising bottom line, with the companys strategy focused on generating efficiencies and simplification. As part of this, it has made disposals while also engaging in acquisitions. This could provide it with a stronger growth opportunity in the long run.

Since Compass Groups dividend payout is currently covered 2.1 times by net profit, it seems to be highly affordable. Therefore, the company may be able to increase dividends at a similar pace to profit growth without hurting its financial position over the medium term.

With the companys bottom line due to rise by 9% in the current year, its potential to become an increasingly appealing income share remains high. Therefore, despite a dividend yield of just 2.1%, it could be a worthwhile income investing purchase.


Plumbing and heating specialist Ferguson (LSE: FERG) continues to reap the benefits of a rapidly-growing US economy. In its most recent quarter, the firm recorded a rise in ongoing revenue of 8.4% in the US. It has also been able to improve gross margin, while maintaining its strong financial position. This should provide it with scope to make further acquisitions that could improve its long-term growth outlook.

Over the last four years, Ferguson has increased dividends per share at an annualised rate of around 15%. Despite such a rapid rate of growth, its shareholder payouts are currently covered 2.8 times by profit. Alongside its improving financial prospects, this suggests dividends could increase at a rapid rate over a sustained period of time especially with its relatively strong cash flow.

While the stock may have a dividend yield of just 2.4% at the present time, its shareholder payouts could be relatively high over the long run due to their growth potential. As such, with the US economy forecast to continue its strong growth rate, now could be the right time to buy a slice of the business from both an income and growth perspective.

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Why I’d buy this FTSE 100 stock yielding 9.7%

The share price of FTSE 100tobacco group Imperial Brands (LSE: IMB) has recovered from a low of 1,847p made towards the end of June. Nevertheless, at a current 2,145p, the company remains on a cheap price-to-earnings (P/E) ratio and high dividend yield.

City analysts expect it to post adjusted earnings per share (EPS) of 282p for its financial year ending 30 September. This gives a P/E of 7.6. Meanwhile, management has committed to a 10% increase in the dividend. This makes the prospective payout around 207p, giving a yield of 9.7%.

Of course, a single-digit P/E and a yield pushing 10% suggest the market isnt exactly taking an optimistic view of Imperials future earnings growth and the sustainability of its dividend. However, management is confident about the prospects for the business, and the investment case is compelling, in my opinion.

Earnings growth prospects

The challenges facing the tobacco industry are widely known. Yet Imperial has a long record of delivering strong price/mix growth to offset industry volume declines. And the rising revenue has fed down to increasing profits and dividends.

Imperials been led for the last nine years by Alison Cooper, who joined the company in 1999 and held a number of senior roles prior to her appointment as chief executive. She knows the company and the industry inside out.

In a Q&A session with analysts at the Deutsche Bank Global Consumer Conference in Paris in June, Cooper provided a very good overview of Imperials positioning in the industry. She also discussed her confidence in the companys ability to continue delivering robust, but modest growthfrom traditional tobacco products alone, with next-generation products being an additive business on top of that tobacco delivery, really taking our revenue growth up and as of next year, starting to add to profits as well.

If Cooper is right about the outlook, Imperials P/E of 7.6 suggests the market is being way too pessimistic about the companys earnings-growth prospects.

Dividend matters

Imperials chief financial officer, Oliver Tant, also participated in the June Q&A, and had some very comforting things to say about the dividend. In particular, he said: There is no issue here about the affordability of our dividend given our current performance and our anticipated performance as we move forward.

Tant explained that having increased the dividend 10%+ a year for the last 10 years, the company sought feedback on future policy from a relatively large group of shareholdersearlier this year. He said these shareholders were less concerned about the ongoing nature of our dividend promise, beyond it being progressive and beyond any concern about a cut, which is a very remote if non-existent possibility.

This provides an insight into Imperials new progressive but more flexible dividend policy (from fiscal 2020), announced a couple of weeks ago and discussed in detail by my Foolish colleague Roland Head.

With a 9.7% yield available at the current share price, and a cut a very remote if non-existent possibilityin the words of Tant, I think the market is being way too pessimistic about Imperials dividend, as well as its earnings growth prospects.

I believe the low P/E and high yield make the stock a bargain. I rate it a buy.

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Calling buy-to-let investors! This one decision could save you a fortune in tax

No-one wants to pay more tax than they have to. Im sure there are plenty of people out there, though, who feel particularly hard done by. Im talking about buy-to-let investors of course.

The UKs landlords are bearing the brunt of the governments sustained failure to solve the housing crisis. Rather than rectifying disjointed homebuilding policy to boost the number of new homes, politicians are simply seeking to free up properties by forcing buy-to-let owners to sell up (or avoid the sector in the first place) by taking the scythe to investment returns.

One way in which theyve done this is by giving the taxman plenty more punch. From hiking stamp duty on second homes, to axing wear and tear allowance and phasing out tax relief for mortgage interest, the subsequent impact on investors wallets has been staggering.

But theres a way to get around this: by choosing to own and operate your property portfolio through a limited company.

Good company?

And recent data shows that more and more of us are saving a fortune in lost tax by doing just that.

According to Hamptons International, some 12% of rental homes in Britain are let out by a company landlord, the highest level for eight years. This is also up from 9% in 2015, just before those tax changes on mortgage interest for non-company landlords were introduced a year later.

Percentage of UK homes let by company landlords

Source: Hamptons International

But is this trick really a lifeboat to rescue returns for buy-to-let investors? Not in my book. Landlords still have to pay considerably more to the taxman than they did just a few years ago, even if they choose to do their business via a company. And with a flurry of other extra costs coming in, like those associated with the Tenant Fees Act, as well as the rising amounts of new regulation associated with rental property ownership, I for one am happy to avoid this particular investment arena.

Boxing clever

Those seeking to grab a slice of the British property sector would be much better off getting exposure via the stock market, in my opinion. And one great way of doing so would be by buying Tritax Big Box (LSE: BBOX), even if it is a bit of a departure from traditional buy-to-let investing.

This FTSE 250 firm provides so-called big-box spaces from which blue-chip retailers and fast-moving consumer goods companies warehouse and distribute their products. Demand for such space is red hot right now as businesses switch increasingly to automation to drive down costs and sell increasing volumes of their wares through online shopping.

And when it comes to the latter point, Tritax Big Box certainly appears to have a lot to look forward to, certainly if a new report from Retail Economics is anything to go by. The researcher estimates that more than half of all retail sales 53%, to be exact will be generated online within the next decade. This compares to around a fifth at the present time.

The stage looks set, then, for trading to thrive at Tritax. Its already delivered a total shareholder return of 82% over the past five years, and theres clearly plenty of reason for it to continue delivering knockout gains long into the future.

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