Why this growth stock could record a 0% return in the next 2 years

This company’s shares appear to be trading at fair value so are there better options available?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

One challenge facing investors is identifying attractive investments versus attractive businesses. In other words, a company may be performing well and release an upbeat update. Its profit may be set to rise in the current year and in future. However, if its shares are already trading at fair value when this outlook is factored-in, it may prove to be a somewhat disappointing investment. Reporting on Wednesday was a company which appears to fit that description.

Impressive performance

That company was recruitment specialist Hays (LSE: HAS). Its first-half results showed a rise in net fees of 17% and operating profit which was 16% higher. It recorded strong performance in its Continental Europe & Rest of World division, with net fees rising by 10% and operating profit up 6%. Similarly, in its Asia Pacific segment, net fees moved 6% higher and operating profit was 12% up on the same period of the prior year.

However, in the UK Hays saw net fees fall by 10%, while operating profit was 29% lower. This was mostly due to the uncertainty brought about by Brexit. The company though, has reacted positively to the tough trading conditions in the UK by reducing costs. It has also seen a degree of stabilisation and its performance in the UK in the second half of the year could therefore be better.

Should you invest £1,000 in Lancashire Holdings Limited right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Lancashire Holdings Limited made the list?

See the 6 stocks

Valuation

Partly due to the slowdown in demand for recruitment services in the UK, Hays is expected to record a reduction in its earnings growth rate. While in each of the last three years it has delivered a double-digit rise in earnings, its bottom line is expected to rise by 7% this year and by a further 6% next year.

This growth rate is roughly in line with that of the wider index. However, Hays continues to trade on a relatively premium valuation, with it having a price-to-earnings (P/E) ratio of 17.5. This is almost identical to its historic average P/E ratio over the last five years, which indicates that the company’s shares are fully valued. And since its earnings growth rate in recent years has been higher than its forecast growth rate, it could be argued that Hays’s rating will experience downward pressure over the next couple of years. This could offset any profit growth in 2017 and 2018, thereby giving a potential 0% return for investors.

Outlook

While Hays faces an uncertain future due to an unclear macroeconomic outlook, there are still opportunities within the recruitment sector. For example, Pagegroup (LSE: PAGE) is expected to record a rise in its bottom line of 10% next year. It trades on a much lower rating than its historic average, with the company’s mean P/E in the last four years being 26.6. Assuming it reverts to its average over the medium term and is able to meet its guidance, Pagegroup could be trading at as much as 651p per share versus its current price of 420p.

Clearly, a 55% return may not be realistic, since Pagegroup’s forecasts may be downgraded. But it offers a much wider margin of safety than its rival at the present time. Therefore, it seems to be a much more attractive investment proposition.

But there may be an even bigger investment opportunity that’s caught my eye:

Investing in AI: 3 Stocks with Huge Potential!

🤖 Are you fascinated by the potential of AI? 🤖

Imagine investing in cutting-edge technology just once, then watching as it evolves and grows, transforming industries and potentially even yielding substantial returns.

If the idea of being part of the AI revolution excites you, along with the prospect of significant potential gains on your initial investment…

Then you won't want to miss this special report inside Motley Fool Share Advisor – 'AI Front Runners: 3 Surprising Stocks Riding The AI Wave’!

And today, we're giving you exclusive access to ONE of these top AI stock picks, absolutely free!

Get your free AI stock pick

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young female business analyst looking at a graph chart while working from home
Investing Articles

After collapsing 28% today, are Bunzl shares too cheap to ignore?

A poor trading statement has sent Bunzl shares to multi-year lows. Could now be a good time to consider investing…

Read more »

Investing Articles

These 5 stocks could earn £1,600 of annual passive income in a £20,000 ISA

Harvey Jones shows how to generate a high and rising passive income by buying a balanced mix of high-yielding FTSE…

Read more »

Young woman holding up three fingers
Investing Articles

3 things I like about Greggs shares

Greggs shares have tumbled by more than a third over the past year. But this writer has no plan to…

Read more »

artificial intelligence investing algorithms
Investing Articles

Nvidia stock: beware the bear market rally

Andrew Mackie argues that investors should tread carefully before investing in Nvidia stock, as the worst of the sell-off could…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

Up 73% in one year, is this the best value stock in the FTSE 100?

A brilliant run of form suggests this FTSE 100 giant should no longer make the cut as a value stock.…

Read more »

Investing Articles

The best could yet be to come for UK shares! I’m buying these ones

Amid ongoing stock market turbulence, this writer's been adding selected UK shares to his portfolio. Here's why and what he…

Read more »

Top Stocks

4 UK stocks trading well below book value to consider buying

Sometimes, it pays to be contrarian: who says the UK market has priced a stock precisely right, anyway?

Read more »

Investing Articles

The S&P 500’s 12% off its highs. Is now a good time to buy US shares for an ISA?

Right now, a lot of British investors are wondering whether it’s a good time to buy US shares. Here, Edward…

Read more »