In terms of the shape of the economic recovery ahead, I believe there’s a good chance it will be ‘K-shaped.’ With this form of recovery, some areas of the economy get stronger, while others get weaker.
Fundsmith portfolio manager Terry Smith appears to share my view. In his recent letter to investors, he wrote that the concept might “help to explain what may happen.”
Here, I’m going to discuss two UK stocks I’d buy for a K-shaped recovery. In my view, both are well placed for the ‘new normal’.
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An online retailer for a K-shaped recovery
One UK stock that strikes me as a good way to play a K-shaped economic recovery is online fashion retailer Boohoo (LSE:BOO). While high street retailers have struggled over the last year, its sales have exploded. For the four months ended 31 December, for example, revenue was up 40%.
Boohoo has a number of things going for it at present. Firstly, it’s benefitting from the shift to online shopping. Between now and 2025, online fashion sales are expected to boom.
Secondly, it’s benefitting from a number of lifestyle trends. The increased focus on health and wellness is boosting demand for athleisure wear. Meanwhile, the increase in the number of people working from home is boosting demand for loungewear.
Boohoo has made a number of acquisitions recently that could boost growth significantly. Last month, it acquired the Debenhams brand. This month, it has picked up the Dorothy Perkins, Burton, and Wallis brands. The company believes these brands strengthen its position as a leader in the global fashion and beauty e-commerce markets.
There are some risks to be aware of here. One is integration risk. There is no guarantee the recent acquisitions will be successful. Another is a potential UK tax on online retailers. There’s also some valuation risk, as the forward-looking P/E of 35 doesn’t leave a huge margin of safety.
Overall however, I see a lot of appeal in Boohoo shares. I see it as a good play for a K-shaped recovery.
A UK disruptor
Another UK stock that I believe could do well in a K-shaped recovery is Keystone Law (LSE: KEYS). It’s an innovative platform-based legal firm that allows its lawyers to work remotely and is therefore very scalable. Last year, it was named ‘Law Firm of the Year’ at the Lawyer Awards.
Keystone posted a very encouraging trading update last month in which it advised that trading throughout December and early January had been “exceptionally strong”. As a result of this performance, the group advised that adjusted profit before tax for the period would be “materially ahead” of market expectations.
Looking ahead, Keystone is expected to keep growing. City analysts expect the company to generate revenue and net profit growth of about 10.4% and 9.8% respectively this financial year.
KEYS shares currently trade on a forward-looking P/E ratio of about 40. This means there is certainly some valuation risk here. If future performance is poor, the shares are likely to fall. It’s also worth noting that this is a small-cap company with a market cap of less than £200m. Stocks of this size can be highly volatile.
All things considered, however, I think this growth stock looks attractive. I see it as a good one to own in my portfolio for a K-shaped recovery.
