Analysts say that stocks with a passive income of 5% could grow by 32% in a year

I think I found a hidden gem. It’s called MP Evans’s Group (LSE:MPE) and three analysts are currently looking at it. The average 12-month price target these bankers have on the stock suggests a 32% upside. What’s more, at a 5% dividend yield on passive income, if these predictions are accurate, I could have a total return of 37% in just one year.

Palm oil business

MP Evans focuses on the production of sustainable crude palm oil in five provinces in Indonesia. It also has interests in a real estate company in Malaysia. The company’s shares are listed on OBJECTIVE market London Stock Exchange.

As a cyclical company, it experiences fluctuations in production due to crop maturity and weather conditions, among other factors. This can lead to stock price volatility. For example, after strong expansion in 2020-2023, the company experienced a decline in 2023-2024. It is now entering a new phase of moderate growth.

Cheap, growing and cash flow generating

Here are the two main reasons why I think this investment is worth my money:

1. The average annual growth rate of earnings per share (EPS) over the three years was 41%.
2. The company has a low price-to-earnings (P/E) ratio of 9.5, which is significantly lower than the industry median of almost 18.

However, this historically high growth rate is unlikely to last long. Analysts are predicting that the company will generate just 6.2% average annual EPS growth over the next three to five years. This is a major reason why the stock has fallen recently.

Low prices mean shopping opportunities

Just because the price has fallen doesn’t mean it’s bad for investors. Instead, a lower price can open up a better valuation. There is a lot of truth in Warren Buffett’s saying: “Be greedy when others are fearful”.

In the case of MP Evans, the key valuation metrics, namely the P/E ratio and the price-to-sales (P/S) ratio, are close to their lowest levels since January 2020.

This opens up a huge opportunity for me. It gives me a margin of safety in the price, meaning any operational failures are unlikely to hit the stock as hard as they would if it were highly valued.

Plus, my earnings are likely to be higher. The fact that the valuation is so low and analysts are expecting better earnings growth over the next few years is probably the main reason why bankers currently have such high price targets for the stock.

What could possibly go wrong?

In my opinion, this is a low risk investment. However, there is one important issue that stands out to me.

While the stock has had a long-term upward price trend since 1988, as I mentioned earlier, it has also shown significant volatility. Given that its price rises and falls over time, it is all the more important that I buy it at the right valuation.

In addition, dividend payments are not typically as high as they are now. I suspect that such a significant 5% yield will be temporary, so I cannot rely on this investment for cash flow stability.

This is a purchase for me

I think this is one of the best hidden gems in the UK stock market at the moment. It is at the top of my watch list and is a likely addition to my portfolio in early October.