Possible 20%+ Returns at a Stretch.

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Here is a quick review of what might be an interesting little play down here which is a stock which has been in the CIS Portfolio for a while now and as a result is currently the position with the largest unrealized gain. I say play because the stock concerned is Character Group (CCT) the AIM listed £95m market cap. toy manufacturer. Now if that doesn't prejudice you against it then why do I think you should take a look at it? Well first up it Scores well on the Compound Income Scores (CIS) and it has done for a while, as it has generally been consistently cheap as the market has tended to be fairly sceptical about it given the nature of the business and its somewhat chequered past. Depsite this though the Company has delivered decent results fairly consistently in the last few years and as such I believe it might be worthy of further consideration.

Just last week they had an in line trading update in which they highlighted two new ranges, one based on the old Hasbro character Stretch Armstrong (see image above which you can click to read more about it) and the other being something called Twozies which is a girls collectible item apparently. They also flagged that a significant proportion of the Company's purchases are made in U$ dollars and, therefore, the increasing strength of the US$ against Sterling continues to put pressure on Group profitability.  Nevertheless, the Board remains of the view that it can continue to mitigate the resulting increased costs.  This is being achieved through the expansion of their international business, which generates revenue and profit in US$'s, and by their continuing active programme of monitoring all costs and rationalising operations where possible through increased efficiencies. They also flagged their strong balance sheet which showed cash of nearly £15m recently and they also suggested this had strengthened further thanks to working capital management and cash generation.

Despite this update and reassurance the share price has come off by around 10% in recent weeks (see chart at the end) which leaves it close to being oversold and looking good value on under 10x this years forecast earnings (which they have just confirmed) and with a yield of over 3% which is more than 3x covered and backed by a cash backed balance sheet, so that looks pretty secure too. It is also worth noting they have grown this at over 20% per annum for the last 5 years and this years forecast dividend of 14p is also therefore expected to be up by over 20% on last years 11p. Perhaps the market was hoping for a better update and another round of upgrades. More likely someone has perhaps been reducing their holding in an illiquid stock a fact which they flagged in a recent update about their share buy back policies. Following on from that they have today announced that they have bought back just over 1% of the share capital 447p & 448p. In addition to which I note that the FD and a non executive director also bought shares recently. So members of the board and the Company, who have been quite good with share buy backs in recent year, seem to think it is reasonable value down here too. The only holder I could see who reduced earlier in the year was Miton who went from over 5% down to 3% or so. Perhaps they have now gone below 3%, guess we'll have to wait and see if there is an announcement on that in due course.

In conclusion I would tend to agree with the board that this looks good value down here as it also has an earnings yield of nearly 15% (EBIT/EV) and based on their recent operating margins of around 10% or more the EV/ Sales for this year of 0.72x also look pretty reasonable too. Technically though the shares have been stuck in a sideways range between about 440p and 560p for the last year or more so at least you would not be buying in at the top but does suggest, at a stretch, possible returns of 20%+ if it can make it back to the top of that trading range.