2 UK stocks I think could beat the index average in the second half of the year
The FTSE 100‘s up around 7% since the beginning of the year, and that tells us it’s been a pretty good six months for UK stocks. However, plenty of them are still looking cheap and I believe these could outperform in the second half of the year.
Left behind in aerospace
The global aerospace sector has performed well in recent years. That’s largely because of a recovery in civil aviation following the pandemic as well as increased defence spending. Rolls-Royce shares are up 970% over five years, but Melrose Industries (LSE:MRO) is up just 98% over the five year period. While that might sound like a good return, five years ago was the middle of the pandemic and much of the growth came later in 2020.
Recent performance has been hampered by supply chain challenges in the broader industry. However, the forecast is starting to look rather positive. Melrose is targeting ambitious growth with management aiming to grow earnings by over 20% annually through 2029, with five-year goals including 43% revenue growth and a doubling of operating margins.
And yet the market continues to value the company at 14.1 times forward earnings. This also suggests a price-to-earnings-to-growth (PEG) ratio around 0.7. That doesn’t seem fair considering the expected earnings growth, but also because the firm has such an impressive economic moat. Around 70% of sales are generated from sole source positions — in other words, there are no peers. Its technology also features in all of the world’s top aircraft engines.
Risks? There are always risks. Net debt’s larger than I’d like to see. Meanwhile, if supply chain challenges persist, Melrose may struggle to hit its 2029 targets. Despite this, I believe it’s well worth considering.
Underappreciated tech
Celebrus Technologies (LSE:CLBS) could be a hidden gem for investors. Despite recent revenue softness — largely due to macroeconomic and geopolitical uncertainty — the company’s earnings have proven resilient, underpinned by strong cost discipline and a shift towards higher-margin software.
Sadly, analysts’ forecasts have disappeared from the internet. They were probably getting old and there aren’t many analysts covering this small-cap tech stock. However, they had been pointing to 14p per share, indicating that the stock’s trading around 10 times forward earnings. That’s not bad considering 35% of the market-cap’s currently covered by net cash.
And it’s this fortress balance sheet that really interest me. It provides financial flexibility and a solid margin of safety. The company also offers a healthy 2.1% dividend yield, rare in the tech sector, and is making progress in building recurring revenues and defending its IP portfolio.
However, I’m sure another disappointing trading update wouldn’t be well received by the market. I typically find investors have little patience with small-cap stocks. It needs to start delivering.
Personally, I believe Celebrus is worth considering. There’s more risk here than I’m used to, given the lack of coverage. However, the cash position provides something of a buffer.
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James Fox has positions in Celebrus Technologies Plc, Melrose Industries Plc and Rolls-Royce Plc. The Motley Fool UK has recommended Melrose Industries Plc and Rolls-Royce Plc. 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.
