Over the last 12 months, Diploma (LSE:DPLM) shares have gone from 2,358p to 3,000p — a gain of 35%. And since October 2018, the stock is up 117%, making it one of the best-performing FTSE 100 stocks over the last five years.
With the stock close to its all-time high, it might look like Diploma’s best days are behind it and the time to buy the stock has passed. But I think this is a mistake.
Buffett’s Apple investment
A lot of the time, making money in the stock market comes down to buying low and selling high. But Warren Buffett’s investment in Apple shows that shares that have done well for some time can often continue to do so.
Buffett (through Berkshire Hathaway) started buying shares in Apple back in 2016 at an average price of just under $25 (adjusting for splits). A year later, the stock had reached $33, a 38% increase.
That’s a pretty good result, but if Buffett had decided to sell, Berkshire’s shareholders would have missed out. Since then, the Apple share price has reached $170, turning a 38% gain into a 580% return.
The lesson here is clear. It would have been a huge mistake to think that Apple’s best days were behind it just because the share price had increased sharply. And I think something similar might be true of Diploma.
Diploma shares
Diploma’s revenue growth indicates to me that it still has a bright future. Over the last 10 years, the company has increased its top line at an average of 13.5% per year.
A lot of that growth has come from acquisitions and this brings a degree of risk going forward. It means management will need to find a steady stream of businesses to acquire and avoid overpaying for them.
As companies get bigger, finding deals that allow them to maintain high growth rates becomes increasingly difficult. But this should be some way off for Diploma — its £4bn market cap makes it one of the FTSE 100’s smallest stocks.
Furthermore, it’s also worth noting that the company isn’t showing any signs of slowing down in the near future. Over the last five years, its revenue growth has actually been accelerating, averaging just under 16% per year.
Buy low, sell high?
Diploma shares are up 35% over the last year and 117% over the last five years. This means it isn’t an obvious stock to buy, especially close to its all-time-highs.
The thing is, this was also true of Apple shares back in 2017. And investors who decided against buying the stock because the share price had gone up 38% over the last year would have missed out on a huge return.
The moral of the story here is that it’s important not to be put off by a stock’s track record. What matters is whether or not the underlying business can continue to deliver going forward.
As I see it, Diploma is in a great position to do just this. I’d rather have bought the stock five years ago and be sitting on a 117% gain, but I won’t make the mistake of thinking that it doesn’t still have some way to go.
