Alex Williams picks two shares for the brave to take a punt on. This week; a challenger bank and a fashion house.
Metro Bank
Investors betting on a shake up of the UK banking sector are spoilt for choice. Richard Branson listed Virgin Money in 2014 and Aldermore listed last year. Now Metro Bank has joined the party. Despite a choppy few months for bank shares, the company has raised £400m in an initial public offering (IPO).
Metro is hoping to break into the Big Four of UK banking, as Barclays, HSBC, RBS and Lloyds all battle bad reputations and clunky IT infrastructure. So far it’s sucked in 700,000 customers and over £5bn of deposits since it launched in 2010.
American founder Vernon Hill (who counts Donald Trump as a golfing partner) has launched similar banks in America and aims to attract a cult-like following of customers. The bank has a conservative loan book of just £3.5bn, making it one of the best-capitalised banks on the high street. The cost of its new stores and its low loan-to-deposit ratio means Metro is losing money, with losses of £49m last year. But the IPO has injected fresh capital, nine new stores will open this year and Hill has ambitions to enter the FTSE 100.
Hugo Boss
Shares in fashion house Hugo Boss have halved in the last six months, after two profit warnings since October. Sales have slowed sharply in China, the firm has slashed prices for its spring collection and is closing 20 stores. Revenue is also down in the US and its CEO has stepped aside.
But the longer-term story is intact. Hugo Boss has consistently high returns on capital and has turned a profit every year since the 1980s. It has a strong online business and its profit margins are up there with Burberry and higher than Louis Vuitton. Despite trouble in China, the group’s total sales have actually risen in the last year.
The dramatic drop in the share price is a healthy re-rating. Twelve months ago, Hugo Boss was trading at 25 times earnings with a 3% dividend yield, leaving little room for error. But at 12 times earnings and a 6% gross yield, the shares have gone too far in the other direction.Gambles of the week