The last three months have seen shares in Young & Co (LSE: YNGA) rise by around 5% as the outlook for the UK pub industry has improved. Consumer confidence remains relatively high, interest rates are staying low and while the new living wage is set to increase staffing costs, they should be able to be at least partly passed on to customers via higher pricing. Therefore, many investors may consider Young & Co to be a sound investment.
However, the company trades on a price-to-earnings (P/E) ratio of 20.9 despite modest growth prospects. For example, over the next two years it’s expected to increase its bottom line by just 4% per annum, which is below the wider market’s anticipated growth rate.
Certainly, Young & Co remains a relatively high quality business, but with other larger pub companies offering better growth and cheaper valuations, there seem to be far better options available elsewhere.
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Valuation under pressure
It’s a similar story for flooring company James Halstead (LSE: JHD). Its shares have risen by 20% in the last year, with investors perhaps being attracted to its strong financial performance. This has been aided by weak sterling and as such James Halstead was able to grow its bottom line by 8% last year. However, with growth of 3% forecast for the current year and a further 6% pencilled-in for next year, James Halstead’s valuation could come under a degree of pressure.
That’s especially the case since the company trades on a P/E ratio of 24.5. This gives James Halstead a price-to-earnings growth (PEG) ratio of 5.4, which indicates that while its shares may have risen by a whopping 750% in the last 10 years, the chances of them repeating that feat appear to be rather slim. As such, it seems prudent to await a lower share price before buying-in so as to provide a wider margin of safety for the long term.
Not there yet
Meanwhile, shares in 88 Energy (LSE: 88E) may also be somewhat overvalued at the present time. That’s because they’ve risen by 341% since the turn of the year even though the company has a long way to go before production or even profitability.
Clearly, it has released positive news flow this year and has benefitted from improving investor sentiment towards the wider resources sector. And with both of these factors having the potential to rapidly change as well as there being the potential for profit-taking among investors, 88 Energy’s share price could come under a degree of pressure over the medium term.
Furthermore, 88 Energy is likely to require additional fundraising over the coming months and years. With there being a number of profitable and cheap resources stocks on offer at the moment, there may be better options for investment available elsewhere.
