Investors who regularly beat the market often give the same advice — cut your losses and run your winners. Investing in stocks that have already risen can be psychologically difficult. But it’s often the most logical and profitable thing to do.
Today I’m going to look at two stocks which have both risen by nearly 40% over the last year. Is it time to take profits, or should these winners be allowed to run?
“We remain confident”
Specialist materials group Low & Bonar (LSE: LWB) said this morning that sales rose by 16.4% to £210.3m during the first half of the year. The company’s adjusted pre-tax profit rose by 23.6% to £13.1m, while adjusted earnings rose by 25% to 2.7p per share.
These figures were admittedly flattered by exchange rates, which added about 13% to the firm’s profits and sales during the period. But even at constant currency rates, first-half earnings growth was still 11.1%, a respectable result.
Chairman Martin Flower says that “we remain confident of meeting the Board’s expectations for the full year”. But Mr Flower also warned while further growth is expected, “we do not envisage a sustained pick-up in our markets”.
Broker consensus forecasts before today’s results were for adjusted earnings to rise by 23% to 7.3p per share this year. As was the case last year, the firm’s profits are expected to be heavily weighted to the second half of the year. There should also be a corresponding improvement in cash flow and a reduction in net debt during this period.
In my view there’s nothing in today’s results to suggest that the company will fail to meet its full-year forecasts. The stock currently trades on a forecast P/E of 11 and offers a prospective yield of 3.7%. I believe the shares remain a buy.
US market has huge potential
Home emergency repair group Homeserve (LSE: HSV) has risen by 305% over the last year. The firm’s stock is already worth 16% more than it was at the start of the year, compared to a rise of just 3% for the FTSE 100.
For this momentum to continue, I believe it will need to be supported by strong earnings growth. Is this likely?
Homeserve’s adjusted earnings rose by 24% to 27p per share last year. That gives the stock a trailing P/E of 26.6. Analysts expect earnings to rise by a further 15% to 31.1p per share in 2017/18, giving the stock a forecast P/E of 23.3.
Based on the stock’s gains so far this year, I’d argue that it’s priced about right. However, the group is hoping that rapid expansion in North America will help it to deliver another step change in growth. Customer numbers in North America rose by 28% to 3m last year, while operating profit in the region rose by 75% to £21.2m.
Homeserve has 2.2m customers in the UK, a much smaller and more mature market. Based on this, it seems likely to me that the group’s North American customer base could grow very much larger.
The group’s operating margin seems stable, at about 13%, and its cash generation is good. Although the shares look quite expensive, I think there’s a decent chance that Homeserve can continue to beat the market and remains worth buying.
