How do you know when a company is too expensive? A stock that’s risen by 100% can easily double again if rising profits or a changing outlook justify further gains.
If you’re considering whether to buy or sell stocks in today’s market, then I believe the answer is to focus on valuation and outlook, rather than gains or losses.
Today, I’m looking at the latest figures from two of last year’s biggest winners. Should you buy, sell or hold these stocks as we head into March?
This big miner still looks cheap
South African mining group Anglo American (LSE: AAL) has risen by 211% over the last twelve months, making it the top performer in the FTSE 100 during that period. The firm published its 2016 results on Tuesday, confirming a decisive return to profitability.
Pre-tax profit was $2.6bn, compared to a loss of $5.4bn in 2015. This translated into underlying earnings per share of $1.72, which puts Anglo stock on a P/E of about 10. Encouragingly, group’s return on capital employed (ROCE), rose from 5% to 11%, suggesting that Anglo is now able to invest cash in its assets at attractive rates of return.
A sharp recovery in commodity prices enabled the firm to reduce its net debt from $12.9bn to $8.5bn last year, even without selling the assets it had earmarked for disposal.
Is Anglo still a buy?
Chief executive Mark Cutifani confirmed on Tuesday that he hopes to restart dividend payments in 2017. The firm’s 2016 results put Anglo on a trailing P/E of about 10, with a price/free cash flow ratio also of 10.
Consensus forecasts indicate further profit growth is expected in 2017. Anglo stock trades on a forecast P/E of 7.5, with a prospective yield of 2.3%. This looks cheap to me. Although last year’s rapid gains are unlikely to be repeated, now could be a good time to buy for income and medium-term growth.
Is 20% slide a buying opportunity?
Shares of oil services firm Wood Group (LSE: WG) fell by 11% in early trade on Tuesday morning, after the firm said that adjusted operating profit fell by 28% to $244m in 2016.
Although the firm’s adjusted earnings of $0.64 per share and its 10% dividend hike were broadly in line with market forecasts, the group’s warning of “challenges in 2017” appears to have spooked investors.
Chief executive Robin Watson said that pricing is expected to remain “competitive” this year. Wood Group only expects to see a “modest recovery” in “selected areas” of the oil and gas market, such as greenfield offshore projects and US fracking.
The firm’s shares have now fallen by 20% in six weeks. But Wood Group’s long-term attractions remain unchanged, in my view. The dividend rose by 10% to 33 cents per share last year, and was covered 1.9 times by adjusted earnings. Net debt of $331m is low relative to underlying earnings, and free cash flow remains strong.
At the time of writing, this stock trades on a P/E of 15, with a dividend yield of 3.5%. Last year’s quick-fire gains are over, but for long-term investors I believe Wood Group shares are worth holding and perhaps buying at current levels.
