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I keep looking for stocks on sale that I can add to my portfolio. I currently own some UK shares in a well known fund manager. They have shot up more than 60% from their October lows, but are still yielding an impressive 6.8%. On top of that, despite the recent rise in the stock price, I can still buy it for 7% less than I would have paid a year ago.
What I am trying to decide is whether the stock in question is a bargain to buy or a potential value trap.
Known fund manager
The company in question is open (LSE: ABDN).
Despite its silly name, it is a serious company with a well-established business. Last year it made nearly a billion pounds in after-tax profit. That gives you an attractive net profit margin. Revenue last year was £1.7bn so net margin was an impressive 59%. With a market capitalization currently at £4.3bn, the price-earnings ratio turns out to be less than five. That certainly looks cheap to me.
But when a stock is performing juicily and has a low valuation, it can be a red flag for me as an investor. Is that true when it comes to these UK stocks?
challenging times
Certainly, Abram has had his share of difficulties.
Fund managers have generally fallen out of favor with investors. Rival Jupiter has seen its share price fall 36% over the past year, while schroders it’s down 22% in that period. That reflects investors’ nervousness that volatile stock markets and tightening family budgets could discourage people from investing in funds, hurting sales and profits at firms like Abrdán.
I see it as a continuous risk. In addition, Abrdán has a way of cutting his dividend. In 2020, the annual payment was cut by almost a third. It has been flat ever since. So while the dividend yield is attractive, it’s not growing and if business worsens, a cut could be on the cards.
business potential
Viewed that way, Abrdán could still become a value trap, especially if his trading performance disappoints.
However, I also think it could be a bargain for my portfolio, even after the sharp rise in the stock price. The company has a well-established place in the asset management industry and a wealth of experience. That can help you attract customers and also weather any instability in the markets.
The business model seems very profitable overall, as evidenced by the juicy margins I mentioned earlier. However, in the interim stage of this year, pre-tax profit was replaced by a substantial loss of £320m, while revenue fell 8% compared to the prior year period.
my movement
I think Abrdán has the ingredients to be a solid business and he likes its performance. So I will continue to own the shares that I own. But clearly there are risks and the performance in the first half of the year gave limited reason to trust the current business trend for the asset manager.
So while I don’t see it as a value trap, I won’t be adding any more Abrdn to my UK stocks portfolio at this time.
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