The sprightliness of equity markets in recent months belies the fact that many businesses ended 2017 on something of a downer. The challenge now facing investors is identifying those that have a better chance of rebounding than most (while remembering that full recoveries often take longer than expected).
Here are a couple of stocks that have caught my eye.
Fetch the vet
Veterinary services provider — and former market darling — CVS Group (LSE: CVSG) is a stock I’ve had on my watchlist for some time now. The only issue has been its rather steep valuation. That’s less of a worry these days.
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Back in November, the Diss-based business disclosed slowing growth in like-for-like sales over the four months to the end of October. According to the AIM-listed company, sales had “shown more variance both within and between months than in prior years, making it harder to identify particular trends“. On top of this, CVS revealed that it had struggled to recruit veterinary staff, particularly since the EU referendum result.
A few weeks on, the subsequent share price fall feels like a huge overreaction. Slowing like-for-like growth isn’t necessarily a cause for concern if numbers from the previous year were particularly strong and/or any issues are temporary. We’d all like to be invested in companies that never fail to impress but the probability of this happening over a sustained period is low.
Concern that funding higher salaries through price increases will lead to CVS losing customers also seems overblown. Some may grumble, but any suggestion that people will suddenly stop spending on their furry companions to save a few pounds ignores the huge bonds owners have with their pets. The likelihood of customers moving to rivals also appears fairly unlikely, especially as the company continues to see high levels of loyalty and more people joining its membership scheme.
CVS’s growth strategy is another attraction. It remains acquisition-hungry, having added 21 surgeries to its portfolio over the current financial year (bringing its total estate to 444 at the end of November) for roughly £20m. The decision to expand into the Netherlands — thus becoming more geographically diversified — looks particularly sound, with the company noting that it continues to see “a large number of opportunities” in the country.
Although nothing is guaranteed, I’d be surprised if CVS traded at these levels one year from now.
Going cheap
FTSE 100 marketing giant WPP (LSE: WPP) is another stock I’ve been watching in recent months. A poor 2017 left its share price languishing just north of the £13 mark — 30% lower than it was one year ago.
A reduction in spending by some of the largest consumer products companies, including Unilever and Procter and Gamble, along with the loss of clients such as AT&T and Volkswagen, impacted on revenues at the £17bn cap, spooking investors into jettisoning the stock from their portfolios.
Even if WPP’s recovery takes a while, I’m finding it hard to argue against the idea that its shares represent excellent value at the current time, trading as they do on just 11 times forecast earnings for the new financial year. Those investing for income may also be attracted by the well-covered, 4.6% dividend yield. Factor-in a fairly robust balance sheet and an inimitable CEO in the form of Martin Sorrell and WPP seems anything but a value trap.
