It's a familiar feeling for value investors... Watching the rising share price of a stock you thought about buying, but didn't. The good news is that a stock's recovery often continues for much longer than expected.
Today, I'm going to look at two value stocks trading well above recent lows, and explain why I think there's still time to buy.
Construction firm Keller Group (LSE: KLR) is a "geotechnical solutions specialist". In other words, it builds foundations and performs groundworks for large, complex construction projects. Think Crossrail, power stations and ports, rather than housing estates.
The group issued a trading update on Thursday that showed the first four months of the year is ahead of the same period last year, in-line with expectations.
Encouragingly, order intake for during the third quarter was described as "good". Keller's like-for-like order book for the next 12 months is now at an all-time high, 15% above the same point last year.
This stock has now risen by 43% from the lows which followed last October's profit warning. But if trading remains in line with expectations, then broker forecasts suggest underlying earnings per share should rise by 19% to 90.4p this year, putting the stock on a forecast P/E of 10.5. A 5.4% dividend hike is expected, giving the stock a forecast yield of 3.2%.
In my view, the opportunity for investors is that Keller's performance may continue to improve, leading to upgraded full-year guidance and further share price gains. Keller could also benefit if the pound continues to gain strength against the dollar.
This small cap is trading well
These gains appear to have been driven by a strong order book and significant upgrades to earnings forecasts for 2017. Clarke's broker now expects the firm to deliver sales of £300m and earnings per share of 11.3p this year, up from £265m and 9.5p per share a year ago.
However, the company's latest trading update suggests that another round of upgrades may be on the way. On 5 May, Clarke reported that its order book had risen above £400m for the first time, up by 22% so far this year. As a result, the firm expects "revenues and profits for 2017 to be ahead of current market expectations".
Clarke appears to be on a roll, with strong order intake. The firm's balance sheet also looks sound to me, with net cash of £9.2m reported at the end of 2016.
However, it's worth remembering that this firm is a low-margin contractor. A downturn in construction market activity levels could lead rapidly to Clarke's order book drying up. Although the group has a strong balance sheet, its operating margin was just 1.6% last year.
At the last-seen share price of 90p, T Clarke shares trade on a forecast P/E of 7.6 and offer a prospective yield of 3.8%. In my view, the shares remain attractive at this level and could deliver further gains. But I think potential shareholders will also need to keep a close eye on market conditions, to avoid being caught by the next downturn.
This could be today's top small-cap buy
If you're looking for small-cap stocks with the potential to deliver significant profits, you may be interested in this company. Our analysts believe that this stock could be undervalued by up to 32% at current levels.
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Roland Head has no position in any 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.