UK mid-caps are in a sweet spot, Reuters argued last week, when thenewsagency also pointed pout thatLadbrokes(LSE: LAD) wasup 9.9% and was the top mid-cap performer followed by up-market London-focused homebuilder Berkeley Group(LSE: BKG) (up 8.9%).
I think mid-caps stocks could offer more attractive returns than those of larger companies at this economic juncture, but if I were to choose two names in those sectors, itwould be Betfair(LSE: BET) and Persimmon (LSE: PSN).
With Ladbrokes I feel youd add volatility to your portfolio, while with Betfair youd be betting on a nice growth story.Ladbrokes is up 3% this year, and its most appealing feature is a management reshuffle, which has been discussed for a long time but is actually taking place right now. Its online strategy doesnt seem to beworking, butLadbrokes remains a valuable brand with a decent infrastructure network.
That said, it doesnt strike me as being an incredible value opportunity based on forward earnings multiples in the region of 18x. New management may have to consider how to deal with capex requirements and dividends if core cash flows continue to deteriorate as it has been the case since 2012.
Moreover, itll take time to implement operational changes and there are better options, such asBetfair, whose shares are up 60% this year, and has long been one of myfavourite picksin the sector.
Is it time to take profit, though?
Betfair reports full-year results in mid-June, and Id hold onto it until then, at the very least.Revenues, earnings and dividends are nicely growing, and are expected to grow for some time thats reflected in a forward valuation that stands at more than 30x earnings.
Management is focused on the operations, which need less capex than at some of its rivals, while the balance sheet is strong. I would not be surprised if Betfair decided to raise some debt to back its expansion plans and boost returns.
Berkeley vs Persimmon
Thomson Reuters UK Homebuilding index up 6.3% at a record high & on course for its biggest one-day rise in about to years, was another headline from Reuters at the end of last week.
A bet on growth in London and the South East, Berkeley stock rose a lot since it shrugged off concerns over Labours mansion tax, but this remains one of the less appealing equity investments in the sector, and I prefer Persimmon because of its geographical reach and a valuation that points to more upside than downside based on the two companieslevels of core profitability.
Berkeleystock is up 11% in 2015, with most of the gains in the last few days of trade. Thats a performance in line with that of Persimmon so far this year, but Persimmon offers a more solid risk/reward profile.
NeitherBerkeley norPersimmon are incredibly expensive based on their relative valuations, butwhile core margins and cash flow are expected to grow at Persimmon, the pressure could build at Berkeley.
With Persimmon, youd also be betting on rising returns from higher capital returns to shareholders, which appear to be on the cards. That said, both companies offerstellar forward yields, efficient use of capital as well as clean balance sheets one caveat is that Berkeleys dividend is less solid, though, based on its cash flow profile.
But if you are after less risky trades, then I suggest you huntfor value in less cyclical sectors, where a few undervalued companieswith similar market caps coulddeliver double-digit growth for earnings and dividends for a few years.
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