One FTSE 250 banking stock I’d sell to buy the Barclays share price

The share price of FTSE 250 lender Metro Bank (LSE: MTRO) fell by 8% in early trade on Wednesday, making it the biggest faller in the mid-cap index.

The sell-off came after the bank announced a 21% increase in first-quarter profits and deposit growth of 41%. So why have the shares sold off? In this article I’ll explain what might be happening and consider whether big-cap rival Barclays (LSE: BARC) offers better value for investors.

Strong growth

There doesn’t seem to be much doubt about the strength of the challenger bank’s growth. Deposits rose by £1,033m to £12.7bn during the first quarter. Net deposit growth per branch increased to £6.3m a month, compared to £5.9m a month last year.

Customer numbers rose by 7.2% or 88,000 to 1,305,000 and the size of the loan book rose by £1,354m to £11bn.

Total lending grew faster than deposits into savings accounts during the period, causing the group’s loan-to-deposit ratio to rise from 82% to 86%. I see this as a comfortable level, as it shows that lending is covered amply by the value of its deposits. A loan-to-deposit ratio of more than 100% indicates that a bank relies on borrowed money to fund its lending. This can cause liquidity problems if demand for cash withdrawals rises unexpectedly.

Why I’d sell

Metro Bank isn’t the only challenger bank that’s growing fast by offering attractive savings and loan rates. But while customer demand still seems strong, profitability seems pretty average to me.

Metro’s net interest margin of 2.24% is no better than most of the big high street banks. And its Common Equity Tier 1 (CET1) ratio — a key regulatory measure — has fallen from 18.1% to 13.6% over the last 15 months. This has prompted analysts to suggest the group could might need to raise more capital this year.

Despite this, the shares now trade on 50 times 2018 forecast earnings and at 2.6 times their book value. Although profits are growing fast, this valuation doesn’t leave much room for disappointment. I would consider taking some profits at this point.

The right time to buy Barclays

On the other hand, I believe now could be the perfect time to buy into the long-awaited turnaround at FTSE 100 stalwart Barclays.

After a frustrating few years for shareholders, the outlook finally seems to be improving. The bank has resolved most of the legacy issues it faced and profits are expected to rise sharply this year. Despite this, the shares still trade at a discount of about 22% to their tangible net asset value of 276p per share.

This discount has been justified because for some years Barclays has failed to generate the kind of sustained profits needed to support a higher valuation. As a result, FTSE 100 banking stocks have remained fairly unpopular with most institutional investors.

A turning point?

According to consensus forecasts, the bank is expected to generate an adjusted after-tax profit of £3,486m this year. This translates into adjusted earnings of 20.7p per share, a 27% increase on last year’s figure of 16.2p per share.

Chief executive Jes Staley has also promised to return the dividend to 6.5p per share, a level last seen in 2015. On these numbers, the stock trades on 10.4 times forecast earnings with a 3% yield. Although Barclays isn’t without risk, I’d rate the shares as a buy in today’s market.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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One Footsie dividend growth stock I’d buy and one I’d sell today

Building materials company CRH (LSE: CRH) might not look like a traditional income stock at first glance, but current City forecasts suggest this business is going to grow into one over the next few years.

Indeed according to City figures, over the next two years CRH’s dividend payout to investors is expected to grow by around 10% to €0.75 per share by 2019. But to me, this looks like a conservative forecast given CRH’s management has always prioritised investor returns.

For example, the firm announced today a €1bn share buyback to return additional capital, even though trading during the first quarter has been mixed. Thanks to “prolonged winter weather conditions and the timing of Easter holidays” first quarter like-for-like sales declined 2%. Group earnings before interest tax depreciation and amortisation (EBITDA) are expected to be in line with last year’s print. 

Nevertheless, after this minor setback, management is expecting EBITDA to be ahead of last year in the second half “in the absence of any major market dislocations,” according to its trading update issued today for the three months ended 31 March.

Improving the portfolio 

CRH’s management is always on the lookout for ways to improve performance. Thanks to these efforts, earnings per share have more than doubled over the past six years. And it doesn’t look as if the enterprise is going to slow down anytime soon. 

During the first quarter, the company spent €150m on six bolt-on acquisitions and is planning €1.5bn-€2bn for further portfolio divestments over the “medium term” as the group tries to streamline its portfolio and improve overall returns. While some of this divestment cash will be returned to investors, I believe some will also be invested in new growth opportunities.

Analysts have pencilled in earnings per share growth of 24% of 2018, followed by 15% for 2019. Based on these estimates, the shares are trading at a 2019 P/E of 12.6, which looks to me to be too cheap considering CRH’s historical growth and income potential. The shares currently support a dividend yield of 2.6%.

Steady dividends 

If CRH looks interesting to me, considering the group’s dividend potential, St. James’s Place (LSE: STJ) on the other hand seems to me as if it might be worth selling.

Even though analysts are expecting the company to report earnings per share growth of 74% to 47.7p for 2018, at 23.5 times forward earnings, the shares look cheap. What’s more, the dividend payout of 48.1p per share isn’t covered by earnings per share, which leads me to conclude that the asset manager’s dividend growth might be constrained in the years ahead.

The company does have a history of increasing its dividend — at around 30% per annum for the past five years — but there’s always been more headroom available. For the past five years, the payout cover has averaged 1.5 times.

Still, management is confident that the firm’s offering will continue to attract new customers, driving earnings growth and better dividend cover. In a trading update published earlier this week, management reiterated its belief that St. James’s can continue to grow assets under management by 15% to 20% annually “during 2018 and beyond.” 

If you believe this to be an accurate reflection of the company’s potential, then perhaps the valuation isn’t too demanding.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

2 growth shares I’d buy and hold for the next 5 years

Whether a company is performing well or not, it can take time for its full potential to be realised via a higher share price. In the case of a turnaround stock, the delivery of a refreshed strategy can take a number of years to have its intended impact. Similarly, a company which has sales growth that is on an upward trajectory could continue to make strong gains over a multi-year time period.

As such, buying and holding shares over the long term seems to be a solid strategy for investors to adopt. With that in mind, here are two companies that seem to offer investment potential and may be worth a closer look.

Impressive performance

Wednesday saw cyber security and data compliance specialist GRC International (LSE: GRC) release its first trading update since its IPO in early March. Since then its share price has more than doubled, with it rising by 20% following its trading update.

The company’s performance in the 2018 financial year has been relatively impressive. It has been able to deliver trading performance which was ahead of previous expectations, and significantly ahead of the previous year. This shows that its strategy appears to be working well, and that investor sentiment could remain buoyant over the medium term.

Total billings for the year to 31 March were in excess of £16.2m, which represents a 122% rise over the previous year’s figure. Revenue is due to show a similar growth rate and is expected to be around £15m.

Encouragingly, there were more than 538,000 website visits in March 2018 compared to 349,000 visits in January. The company believes there is a strong correlation between website traffic numbers and billings, which indicates that its new financial year could enjoy further growth.

As such, GRC International could be worth buying for the long term. While potentially volatile, it appears to be performing well in what remains a fast-growing industry.

Turnaround potential

Also offering long-term growth appeal within the technology industry is Micro Focus (LSE: MCRO). The company has experienced a turbulent recent past, releasing a profit warning as well as news of the resignation of its CEO. This has contributed to a fall in its share price of around 50% in the last year.

Despite the challenges it faces, Micro Focus is still expected to report a rising bottom line in the current year. Its earnings are forecast to rise by 2% this year, followed by growth of 7% next year. Following that, a turnaround seems to be possible, since it has a strong position in various key markets. Therefore, a price-to-earnings growth (PEG) ratio of 1.3 indicates that is could offer good value for money.

Alongside this, the company has a dividend yield of around 5.5% from a payout which is covered twice by profit. This suggests that its total return could be high, and its potential rewards seems to outweigh its risks.

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Peter Stephens owns shares of Micro Focus. The Motley Fool UK has recommended Micro Focus. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Why I believe the Boohoo share price is too cheap to ignore

Compass pointing towards 'best price'

At first glance, the suggestion that fast fashion online retail giant boohoo.com (LSE: BOO) is a cheap stock looks absurd, especially when compared to other companies in the sector in which it operates.

Nevertheless, relative to the share price highs reached back in September (and following a near 40% fall before today), boohoo now looks a far more attractive proposition. Factor in today’s full-year numbers and its ambitious growth strategy and I continue to be bullish on the disruptive Manchester-based business’s prospects over the long term.

“Exceptional performance” 

In the 12 months to the end of February, revenue soared 97% to just under £580m, with growth seen “across all geographies“.

Having now gained 6.4m active customers, the biggest contributor to sales understandably remains the main boohoo brand. Here, revenue rose a solid 32% to £374.1m.

That said, the recent performance of the company’s other brands is even more encouraging.

Thanks to its strategy of using high profile celebrities in its marketing campaigns, PrettyLittleThing contributed £181.3m in revenue — a rise of 228%. Taking into account this “exceptional performance” and the fact that active customers climbed 128% to 3m over the year, today’s announcement that the retailer will move into its own warehouse in the first half of FY19 isn’t all that surprising. 

Having grown its product range to 5,000 lines in the year since it was acquired, Nasty Gal also brought in £24.4m — exceeding the company’s revenue estimates for the first year.

Despite an expected fall in margin (to 52.8% from 54.6%) and “a backdrop of difficult trading in the UK“, gross profit still rose 90% to £306.4m. Adjusted pre-tax profit also jumped 60% to £51m.

Looking to the future, the AIM superstar stated that there had been a “strong start” to trading in the new financial year and that group revenue growth was likely to be somewhere in the region of 35-40%. With the extension to its distribution centre now built, fit-out “on schedule“, and everything due for completion by “early 2019“, it really does feel like this company is only just getting started.

One for the long term

Taking into account today’s results, the 15% rise in the price of boohoo’s stock in early trading this morning feels justified.

While some may begrudge the short-term impact of increased investment, joint CEOs Mahmud Kamani’s and Carol Kane’s strategy looks perfectly sound, particularly if it will allow the company to achieve sales growth “of at least 25% whilst maintaining a 10% EBITDA margin” over the medium term, as predicted in today’s statement.

Aside from this, I’m optimisic on boohoo’s chances of replicating the success of PrettyYoungThing at Nasty Gal, especially given that the latter is still relatively unknown outside of the US compared to boohoo’s other brands. The fact that industry peer ASOS acts as a third party seller also means that its smaller peer can piggyback on the £5bn-cap’s international growth story. 

As a further incentive, boohoo’s balance sheet still looks incredibly robust. Taking into account the £133m net cash position at the end of the reporting period, I wouldn’t be surprised if the company considered adding more brands to its portfolio over the next few years. 

The incredible share price momentum seen between 2016 and 2017 may not be repeated but, for those prepared to look beyond the initially-lofty-looking valuation, I remain convinced that boohoo still warrants serious consideration among long-term, growth-focused investors.  

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Paul Summers owns shares in boohoo.com. The Motley Fool UK has recommended boohoo.com. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

A 5% FTSE 100 dividend stock and a growth stock I’d buy and hold forever

WPP (LSE: WPP) is facing the kind of disruption that it hasn’t faced since founder Martin Sorrell decided to turn what was then known as ‘Wire and Plastic Products’ from a shopping basket manufacturer back in the mid-1980s into the global advertising giant that it is today.

Ad budgets have been seriously shrinking for more than a year now, leading to charges against the FTSE 100 firm that it has been too slow in responding to the decline in traditional media forms and in embracing digital communications more effectively.

But what’s really shaken WPP is the departure of Sorrell as he was embroiled in an investigation into possible misconduct. Naturally much speculation is circulating over the direction of the marketing mammoth following its creator’s exit, while talk of a break-up of the group is also doing the rounds.

These issues have caused WPP’s market value to contract more than 40% from the all-time highs struck in March 2017. For long-term investors, however, I think now could be a great time to pile in — the company’s steady (if slow) move into the digital sphere is bearing fruit, and the exceptional revenues opportunities of its pan-global footprint and strong emerging markets exposure are also worth paying attention to.

Besides, the departure of its veteran head could provide WPP with the fresh injection of ideas that it has been crying out for of late.

Set to strike back?

And I reckon now is a brilliant opportunity for income investors to buy-in today. WPP has been a favourite among dividend chasers for many years, with shareholder rewards having risen by more than 75% during the past five years against a backdrop of constant profits growth.

Reflecting current trading troubles, earnings at the firm are expected to fall 26% in 2018, meaning City brokers are expecting the dividend to remain on hold at 60p per share.

In better news however, this projection still yields a mighty 5.3%. And looking further down the line, in 2019 WPP is expected to snap back into earnings expansion with a 4% rise, this bubbly prediction also creating expectations of fresh dividend growth as well. A 62.4p payment is currently predicted, a reading that nudges the yield to 5.5%.

Clearly WPP is not without its degree of risk. But I would argue though that this is reflected in the stock’s ultra-low forward P/E ratio of 9.5 times.

Build brilliant returns

Now Cairn Homes (LSE: CRN) may not be paying the sort of monster dividends that can be found over at WPP. Nor is it matching the colossal payouts afforded by most of London’s listed housebuilders.

However, the yawning supply imbalance in the Irish homes market still makes the business an excellent stock selection in my opinion. Furthermore, with Cairn lighting a fire under production rates profits really look likely to fly, as underlined by City forecasts.

After swinging back into profit in 2017, the builder is expected to keep up the pace this year and record an 888% bottom line improvement. A more modest 65% advance is estimated for next year, although clearly this is not to be scoffed at.

At current prices Cairn Homes deals on a dirt-cheap forward PEG multiple of 0.2 times. This is far too cheap given that its robust earnings outlook stretches a long, long way into the future.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

This FTSE 250 growth stock could be a stunning buy after today’s news

While the world economy has enjoyed an increasingly prosperous period in the last five years, the performance of the FTSE 100 has been somewhat disappointing. The UK’s main index has risen by 15.6% during that time, which works out as a capital gain of around 2.9% per annum.

In contrast, the FTSE 250 has gained 43.3% (or 7.5% per annum) during the same time period. As such, hunting for mid-cap growth shares could be a shrewd move for long-term investors. With that in mind, here is an impressive growth stock which reported sound results on Wednesday.

Improving outlook

The company in question is reinforced polymer technology specialist Fenner (LSE: FENR). The company’s half-year results showed progress across the business, with underlying profit before tax rising by 96%. On a per share basis, underlying profit gained 90%, while the company was able to reduce net debt by £27m to £75m during the period. This should provide a lower-risk outlook for the business in what may prove to be an uncertain period in many of its key markets.

Looking ahead, Fenner is forecast to deliver earnings growth of 26% in the current year, followed by further growth of 21% next year. Despite such strong growth rates, it trades on a relatively modest valuation. It has a price-to-earnings growth (PEG) ratio of just 1.2, which suggests that it offers a wide margin of safety.

While in the last five years the company has experienced a difficult period, it now seems to have a solid strategy which could catalyse its share price performance. As such, now could be the perfect time to buy it ahead of a period of improving financial performance.

Bright future

Also offering high growth prospects within the FTSE 250 is JD Sports Fashion (LSE: JD). The clothing retailer has experienced a strong period of growth in recent years despite a challenging period for UK consumers. It has been able to grow its bottom line at a double-digit pace in the last three years, with an international growth strategy now starting to take shape.

Looking ahead, JD is expected to report a rise in earnings of 3% in the current year, followed by further growth of 10% next year. This puts it on a price-to-earnings growth (PEG) ratio of just 1.6, which suggests that it offers a wide margin of safety.

Although the past year has been a difficult period for UK consumers, trading conditions may improve in future months. Inflation has now fallen below wage growth, and this could prompt higher spending among consumers who now have rising disposable incomes in real terms.

While Brexit may cause some uncertainty over the medium term, the performance of the UK economy continues to be robust. As such, buying JD could be a shrewd move – especially since it continues to diversify away from the UK and offers an improving risk/reward ratio.

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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

2 monster growth stocks set to crush the FTSE 100

Even though the FTSE 100 has risen by over 7% in the last month, there continue to be growth opportunities across the UK stock market. Investor sentiment appears to be buoyant and perhaps more resilient than expected given the risks from higher inflation and rising interest rates across the globe.

With this in mind, there could be buying opportunities available for long-term investors. Reporting on Wednesday was a company which offers strong growth, while an industry peer could also be an impressive performer in future years.

Solid performance

Wednesday saw gold and silver miner Fresnillo (LSE: FRES) sharing its first quarter production update. It was generally positive and showed that the company is on target to meet its guidance for the full year.

During the quarter, silver production increased by 14% versus the same period of the previous year. This was mainly due to the contribution from San Julian JM (phase II). Quarterly gold production increased by 4.1% year-on-year, with it benefitting from a higher contribution from Herradura.

Rising production means that Fresnillo is expected to deliver an increase in its bottom line of 14% in the current year, followed by further growth of 10% next year. This puts it on a price-to-earnings growth (PEG) ratio of 1.9, which suggests that it may offer good value for money at the present time.

Certainly, the prospects for the gold and silver prices remain uncertain. Higher inflation expectations could provide a boost to their prices, although rising interest rates may offset this to some extent. Given that Fresnillo seems to offer growth at a reasonable price and volatility remains high in stock markets, it could prove to be a sound buy.

Improving prospects

With the oil price having risen significantly in recent months, the outlook for the oil and gas industry has improved. Cairn Energy (LSE: CNE) is a stock which could benefit from improving sentiment across the industry, with its exploration and development programme now due to deliver rising production over the next couple of years.

In fact, the company is expected to be profitable in the current financial year and then generate earnings growth of 73% in the 2019 financial year. This has the potential to boost investor sentiment in the company. And with it trading on a PEG ratio of 0.3, it appears as though there is a wide margin of safety on offer. This could mean that even if the oil price experiences a decline, the company’s share price may not be severely affected.

Of course, Cairn Energy remains a relatively high risk stock in terms of its exposure to commodity prices. But with what seems to be a solid balance sheet and an asset base which could generate high returns, it could be worth buying for the long term. Its valuation suggests that the market has not priced in its full potential.

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Peter Stephens owns shares of Fresnillo. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

I’d happily sell Tullow Oil to buy this 6% yielder

Tullow Oil’s (LSE: TLW) shares may be back on an upward charge, but I remain happy to sit on the sidelines.

The fossil fuel giant is now trading at its highest since last March above 235p per share, investor appetite still igniting on the back of resurgent crude values. The Brent benchmark was last trading through the $75 per barrel marker and at levels not seen since the dying embers of 2014.

Oil values have gained additional traction as, in tandem with existing supply fears in the wake of recent military action in Syria, market makers are also considering the prospect of fresh US sanctions being imposed on Iran and the possibility of extra disruption to supplies.

In this climate it would be foolish to rule out additional crude price strength. However, I remain unconvinced by the outlook for oil prices further down the line.

US pumping away

OPEC and Russia have of course given energy prices terrific support since the start of 2017 via their pumping cap. However, concern is mounting that, with oil prices continuing to charge as the market surplus declines, the cartel and its partners in Moscow may be tempted to turn the taps up again when the current agreement runs out later this year.

This could prove a disaster for oil prices, particularly as US shale producers continue to boost output at a stratospheric rate. The enormous political and commercial implications of this mean that OPEC will likely have limits on how long it will sit back and watch US output quickly accelerate before joining the party. UAE oil minister Suhail Mohammed Faraj Al Mazrou recently urged more nations to join the supply accord in an interview with German newspaper Handelsblatt.

Too much risk?

Against this backcloth I believe investing in Tullow Oil is a very risky proposition. While the African driller has worked hard to pull down its colossal debt pile, it is still mountainous enough to potentially leave it in a tough position should crude values stage a reversal from current levels.

Despite surging energy values and Tullow’s improving production outlook, earnings at the business are still set to fall 42% and 5% in 2018 and 2019 respectively, or so says City consensus.

When you throw an uninspiring forward P/E ratio of 16.6 times into the mix, I see little reason to invest in the FTSE 250 driller today.

The 6% yielder

I’d be much happier to sell out of Tullow Oil and to splash the cash on Randall & Quilter (LSE: RQIH) instead.

While the insurance specialist is expected to endure an 11% earnings reversal in 2018, it is expected to flip back into growth with a 21% advance next year as its decision to hive off non-essential operations and double down on its core operations begins to bear fruit.

Further to this, 2018’s anticipated bottom-line reversal still leaves the company dealing on a rock bottom forward P/E ratio of 10.8 times.

And income chasers will cheer news that this expected blip is not predicted to hamper further dividend expansion either — an anticipated reward of 8.8p per share for last year is expected to stomp to 9p and 9.3p per share for 2018 and 2019, figures that produce vast yields of 6% and 6.2% respectively.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.