Shares are down from recent highs at Lloyds Banking Group (LSE: LLOY), BP (LSE: BP) and Alumasc Group (LSE: ALU) but the investment story remains compelling in each case. Are we seeing a good-value entry point for these shares right now?
Alumasc Groups share price took a 22% dive recently when the building products supplier released its AGM statement on 22 October. Generally, the chairmans comments were positive and upbeat about the firms operational and financial progress, but one little paragraph buried in the statement seems to have spooked investors. The chairman said,
We have seen some evidence that capacity constraints within the construction industry generally have caused delay to some projects. While this may have an impact on timing, we continue to believe that managements expectations for the groups full year financial performance will be achieved.
The reaction of the shares goes to show how twitchy investors are about cyclical firms just now, at this arguably late stage in the general macro-economic cycle. Many are looking for the next occurrence of peak earnings with the cyclicals; you know, the one before profit and share-price collapse as we lurch into the terrifying plunge of the next down-leg.
Despite the weakness in Alumascs share price, I still like the story. The firm recently sold the larger of its two engineering products businesses to focus on its building products operations where the directors anticipate a better opportunity to drive growth. Such re-invention and concentration of activities could augur well for future success. Its usually more effective and profitable in business to do few things well than many things in a mediocre way. I wonder if this move by Alumasc could mark an inflexion point for the firm where accelerated growth might kick in down the road.
A potential fly in the ointment
Alumasc aims to focus on the construction industry, a sector with notorious cyclicality. By extension, Alumascs future profits and share-price movements will likely follow the fortunes of the construction sector. Thats a potential fly in the ointment of Alumascs ongoing growth story and a probable reason for the firms ostensibly low valuation.
At todays share price of 175p FTSEFledgling constituent Alumasc Group trades on a forward price-to-earnings (P/E) rating of nine and the forward dividend yield runs at 3.7%. City analysts following the firm expect 2016 earnings to grow 5% and cover the payout three times. The valuation looks tempting, but not if earnings crash in some macro-economic downturn such is the judgement call we all need to make when investing in cyclical firms today.
What about the big firms?
Since the middle of 2012, Alumascs shares have been creeping up. The firms ongoing development as a focused building products supplier and niche market operator could help drive investor total returns higher than what we might achieve investing in the likes of undifferentiated cyclicals such as BP and Lloyds Banking Group.
The outcome for BP depends on what the price of oil does a factor that the firm cant control. A persistently low oil price changes the outlook for BP and Im not one of those hoping for, or counting on, a recovery to previous highs in the price of oil. Therefore, to me, investing in BP is off the agenda; instead, Im in favour of firms operating in sectors that might benefit from a prolonged period of lower oil prices. Thats why Alumasc seems attractive to me.
Lloyds Banking Group strikes me as a similar investment proposition to BP. Lloyds is a commodity-style business with products and services similar to those of its competitors. In order to thrive, Lloyds depends on a buoyant macro-economic environment. Growth seems set to be hard to achieve in the competitive banking landscape that prevails in Britain, and regulatory headwinds persist.
Of the three firms featured here, I think Alumasc Group comes closest to presenting a golden opportunity for investors, but even so, I’d be careful not to buy and forget this company’s shares. Alumasc Group seems well worth further research as a potentially viable alternative to investing in cyclical mega-companies, such as Lloyds Banking Group and BP. If you like Almunasc, you’ll probably be interested in another small-cap company that excites our analysts. In a special wealth report, the investment team highlights a little-noticed small-cap share with great potential. You can find out more, free of charge, by clicking here.
Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.