When buying shares, it’s important to distinguish between great companies and great investments as they’re not necessarily the same thing.
Just because a company has a good track record of growth doesn’t automatically mean it’s a good investment. Demand for its shares may have pushed its price up to a valuation that offers very little value going forward.
Patience is everything in this game, and if a stock looks expensive, it’s often better just to put it on a watch-list and wait for an opportunity to buy at a later date. Today I’ll look at three prominent FTSE 350 stocks and examine whether they’re currently priced to buy.
No value here
Reckitt Benckiser Group (LSE: RB) is a classic Warren Buffett-type stock due to the fact it manufactures basic everyday products that people all over the world have a need for.
The consumer goods giant owns brands such as Nurofen, Dettol and Durex and has a great track record of growing its revenues over the long term. But is Reckitt Benckiser priced to buy?
Well, looking at its current P/E ratio of 28.4, I’m not convinced the company offers much value at the moment.
Although the P/E ratio falls to 24.8 on next year’s earnings, I still believe this is too expensive, especially given the fact that the company’s revenues and earnings have plateaued in the last few years.
Furthermore, as a dividend investor, I’m not particularly excited about the company’s yield either. At 2% it’s less than half the average FTSE 100 yield, and I believe there are better dividend opportunities elsewhere.
Don’t get me wrong, Reckitt Benckiser is definitely the kind of company I’d like to buy for my ISA or SIPP at some stage, yet at the current share price I’m happy to sit on the sidelines and wait until the valuation is more attractive.
Property market momentum
Property website Rightmove (LSE: RMV) has been riding high on the back of the UK property boom in recent years.
The company has performed exceptionally well and in the last five years revenues have increased from £81.6m to £192.1m while the share price has rocketed up from just over 1,000p in 2011 to 4,230p today.
While it’s tempting to buy Rightmove in search of further gains, the company’s current P/E ratio of 37.1 is quite lofty. Although the ratio falls to 30.8 on next year’s forecast earnings (not outrageously high for a fast growing company) the big issue for me is whether the UK property market can continue to charge forward. A slowdown in the property market would likely affect earnings at Rightmove and given the high P/E ratio, I won’t be buying it just yet.
Appealing value
In contrast, I do believe budget airline easyJet (LSE: EZJ) offers compelling value at its current share price. Of the three stocks, easyJet has actually produced the best returns for shareholders over the last five years, with compounded annual returns of an enormous 37% per year.
Furthermore, the company pays the highest dividend of the three, with a 3.6% dividend yield that’s strongly covered. And yet easyJet is trading on a low P/E ratio of just 11.5.
Clearly there’s uncertainty for easyJet with the upcoming Brexit vote, but in my opinion, this is a stock trading at an appealing valuation and is priced to buy.
