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When I bought construction and engineering firm Costain Group (LSE: COST) on 29 November 2023, it fitted the technical definition of a penny stock. The shares cost me 60p. Today, they’ve more than doubled to 125p, so it’s a penny stock no more. It’s a red-hot growth stock and I love it.
Costain’s now the best-performer in my Self-Invested Personal Pension (SIPP). But by my standards, it was a bit of a punt.
Most of my holdings are FTSE 100 blue-chips, often chosen for their dividends. Many have slimmer growth prospects as a result. 3i Group, Rolls-Royce Holdings and Lloyds Banking Group have powered on since I bought them, but none have matched Costain.
Recovery story with substance
The share price collapsed in 2020. Lockdowns hit construction hard and Costain also had to swallow £90m of losses linked to specific contracts. It was all a bit sticky, and investors deserted the stock. But when I took a closer look in late 2023, one thing stood out. It had net cash of £200m against a market-cap of £160m.
That’s what made me take the plunge. The company had money in the bank and was earning a decent rate of interest on it too.
It was in the early stages of a turnaround and, happily, it’s continued. CEO Alex Vaughan has delivered steady progress. Last year’s £10m share buyback boosted confidence. And on 15 May, the group confirmed that trading this year has remained in line with expectations.
Costain’s on track to hit its adjusted operating margin run rate target of 4.5% in 2025. Its forward work position, a key industry measure, jumped £1.5bn to a record £5.4bn. The board expects net cash to finish the year close to £180m. That’s below today’s £340m market-cap but still a source of comfort.
Momentum still strong
Costain’s strategy of focusing on critical national needs seems to be delivering. Recent contract wins include work in nuclear energy. The board remains confident and so do analysts. Of the six offering one-year ratings, five say Strong Buy and one says Buy.
However, share price growth may now slow. The 16 analysts offering price targets suggest a median forecast of just over 145p. That’s a relatively modest rise of around 17% from today.
Nothing climbs forever. After a gain of 47% over one year and 217% over three, the quick money may have been made.
Risks remain
Construction can be a volatile sector. Costain’s still vulnerable to the broader economy and government spending. Chancellor Rachel Reeves has axed some infrastructure projects. On the flipside, her push for pension funds to invest in UK infrastructure might work in Costain’s favour.
There’s also the matter of interest rates. Costain benefits from solid returns on its cash pile, but lower rates could reduce that. While rates remain relatively high for now, they may slide over time.
Even so, I’m still glad I took a chance on this hidden gem. Costain has momentum, a healthy order book and cash in the bank. I may even consider buying more, but I won’t be expecting to double my money again in a hurry.
