Today I’m looking at two growth stocks which have each delivered gains of more than 50% for shareholders over the last year.
Both look like decent businesses to me and both have some high profile backers. But in my view the downside risks are growing. I’m not sure now is the right time to take a gamble.
Financial whizz kid
Software group First Derivatives (LSE: FDP) announced this morning that full-year profits for the year ending 28 February should be “moderately ahead” of current market forecasts.
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Given that consensus forecasts were downgraded in February, today’s news should be good for the stock. But First Derivatives’ share price hardly moved following today’s news.
What’s the story?
This company specialises in high-speed analysis of large volumes of data. Financial firms are the group’s main customers, but First Derivatives also operates in the technology and energy sectors and is targeting further expansion.
The shares have been strong performers and have risen by 470% over the last five years. However, sales and profits haven’t kept up. Sales for the year just ended are expected to have topped £144m. That’s only about 155% more than five years ago.
Operating profit has only risen by about 70% over the last four-and-a-half years. This has resulted in the operating margin falling steadily, from 17% in 2012 to just 9.3% last year.
A final concern is that regular issues of new shares mean diluted earnings per share have only risen by 31% to 36.7p since 2012/13.
The stock currently trades on a forecast P/E of 43, with a yield of just 0.8%. In my view, investors need to consider whether profit margins are likely to improve before investing. At the current price, this stock looks too expensive to me.
Storing up problems?
Revenue rose by 4.5% to £8.3m at self-storage firm Lok’n Store Group during the six months to 31 January. The group’s adjusted pre-tax profit was 13.5% higher, at £2.1m.
The company said that it saw a 4.6% increase in like-for-like unit occupancy, which rose to 61.8%. Pricing was up by 1.1% on a like-for-like basis.
Self-storage seems to be a growth business. Lok’n Store now has a total of 33 stores and expects to open four more during the current year. The group’s finances look healthy, with net debt of £16.7m and a loan-to-value ratio of just 14.4%.
Management says that one of its main goals for the year ahead is to improve occupancy and increase the cash generated by its storage units that can be distributed to shareholders as dividends.
However, I think investors need to consider Lok’n Store’s valuation. The stock currently trades at a 15% premium to its adjusted net asset value of 387p and offers a forecast dividend yield of just 2.1%.
Increased occupancy at current prices could fund rapid dividend growth. But any fall in occupancy or pricing could cause the firm’s profits to fall fast. Although Lok’n Store is committed to long-term mortgage and lease payments, the firm’s customers often only commit for a few weeks at a time. So the outlook could potentially change very quickly.
In my view, it looks fully priced at current levels. I’d rate the shares as a hold, at best.
