Deciding when to sell a stock is one of the biggest challenges facing an investor, particularly when it’s one that has done the value of their portfolio no harm at all over the time it’s been held.
Today, I’m looking at two examples of companies where it could be advantageous to stay invested, at least for the time being, despite the high valuations being placed on them.
Electrifying performance
Today’s update from global service distributor Electrocomponents (LSE: ECM) has been well received with the shares climbing almost 4% in early trading. It’s not hard to see why.
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Thanks to a “positive market backdrop“, the company saw a 10% rise in revenue over the six months to the end of September, with growth achieved in all regions that it operates in. It’s own-brand business — RS Pro — performed even better than the company as a whole with like-for-like revenues moving 12% higher. Recent acquisition IESA was no slouch either, also registering double-digit revenue growth.
In addition to these pleasing numbers, the FTSE 250 constituent stated that it has seen some improvements on gross margin over the reporting period, to the point that these are now likely to be “stable” for the full financial year. £4m of cost savings was also announced.
On a price-to-earnings (P/E) ratio of just under 21 before today, it’s fair to say that Electrocomponents was already looking rather expensive compared to industry peers.
With the company’s official interim results set to be revealed next month, however, I think there could be more upside ahead. Adjusted pre-tax profit of roughly £100m has already been predicted, comparing favourably to the £79m achieved over the same period in 2017. The company also stated that it was continuing to capitalise on recent “strong momentum” by undertaking more investment, with a particular focus on the Asia Pacific region.
While a 105% gain in just two years isn’t to be sniffed at, I see no reason to part with the stock just yet.
Gathering speed
Also reporting today was hot stock AB Dynamics (LSE: ABDP) — a business that’s more than matched Electrocomponents in terms of share price performance since 2016.
While certainly not the most comprehensive update you’ll ever come across, it’s sure to leave a big smile across the faces of those already holding shares in the £250m cap designer and supplier of advanced testing systems to the car industry.
Following excellent performance through its financial year (ending August 31), management now believes revenue and pre-tax profit will “significantly exceed market expectations“. Chairman Tony Best attributes AB’s ongoing success to rising sales of its track testing products to firms involved in the development of self-driving cars — something I speculated on last November.
While a P/E of 31 before markets opened this morning looked rich, the near-15% rise in share price since only goes to show why buying companies on initially frothy-looking valuations can still pay off, so long as they are of sufficient quality.
It may pay to wait for traders to part with their profits from today before beginning to build a stake in the company, but I doubt the positive momentum is likely to end any time soon. Still only a market minnow and with plenty of growth left in the tank, I continue to be bullish on AB’s future.
