What do local election results mean for UK stocks?

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Belfast City Sunset with colorful twilight over Lagan Weir Pedestrian and Cycle Bridge spanning over the Lagan River in downtown Belfast

UK stocks fell on Friday (8 May). But I don’t think some interesting local election results are something investors need to spend much time thinking about.

The results might give some indication about future UK elections and — by extension — policy. And that can obviously impact businesses in different ways. But the biggest takeaway is that the volatility of the past decade may be about to get worse.

Importantly though, there are companies that do well in just about any situation. One stands out to me.

Essential maintenance 

Renew Holdings (LSE:RNWH) undertakes essential maintenance for rail, energy, and water infrastructure. But there’s more to it than meets the eye.

Utilities in the UK operate as regulated monopolies. But in exchange for protection from competition, they have to invest in their assets. Regardless of who’s in charge of local councils, this is an industry that’s likely to be pretty durable in the face of volatility.

This isn’t about growth, it’s about mandatory maintenance. It may sound like work any engineering firm can do. But it isn’t – it’s highly specialised and requires sector-specific skills and expertise. 

Renew has been turning itself into a leader in this area in the last 10 years. And the results have been more than impressive.

Growth

In the last decade, Renew’s more than doubled its revenues. But that’s not just the result of increased maintenance spending. The firm’s made a series of acquisitions. In doing so, it’s gone from a general construction company to a specialist maintenance outfit.

A good example is its latest move. Edwards Diving Services doesn’t just bring sales and profits – it adds specialist skills, giving the firm the ability to undertake underwater projects. And with water maintenance set to rise, this could be very valuable.

Maintenance might not be the most dynamic growth industry. But that hasn’t held Renew back over the last 10 years.

What could go wrong?

What we have then, is a business in a politically agnostic industry with unusually strong growth prospects. And it trades at a price-to-earnings (P/E) ratio of 15. There’s also no major debt on the balance sheet and I doubt that any government is going to want to cut spending on infrastructure maintenance. So what could go wrong?

The biggest risk, in my view, is that Renew could overpay for an acquisition. The firm has a great record, but even the best make mistakes. The way to assess this is to keep an eye on metrics like the firm’s return on capital employed. That’s where warning signs will start to show up.

So far, so good. But this is something for investors to pay attention to if the company keeps using acquisitions to drive growth.

All-weather investing

Investing isn’t about predicting the next political development. I can however, see why it might feel like that recently. 

It’s about identifying companies that generate good returns in the future. And I think Renew is an unusually good example. It operates in an industry where demand’s likely to be resilient even in a recession. But it also has an impressive growth record and good prospects.

That’s an unusual combination. The company doesn’t get the most attention from analysts, but I think it’s well worth a closer look.

The post What do local election results mean for UK stocks? appeared first on The Motley Fool UK.

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Stephen Wright has no position in any of the 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.

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