When it comes to investing, buying the right stocks at the right time is the fastest way to making a significant profit. However, if a company does not fulfil both criteria, then it can lead to major losses and take a very long time for a falling share price to return to break-even.
For example, the likes of Capita (LSE: CPI) and Berendsen (LSE: BRSN) appear to fulfil one of the criteria. They are both high quality stocks that have excellent track records of profitability. In fact, both companies have posted a growth in earnings in each of the last five years, with Capita’s bottom line rising at an annualised rate of 11% and Berendsen’s by 10% per annum during the period. They are both superb rates of growth – especially when you consider that the UK and global economy has endured a challenging period within the last five years.
However, where both stocks lack appeal as investments is with regard to their timing. In other words, they may be the right stocks, but this does not appear to be the right time to buy them. That’s mainly due to such strong share price performance that has been posted in recent years, with Capita’s share price rising by 81% since 2010 and Berendsen’s soaring by 132% in the same time period. As a result, they trade on relatively high valuations given their earnings outlooks.
In fact, Capita has a price to earnings growth (PEG) ratio of 2.4, while Berendsen’s is 2.1. Both of these figures indicate that the two companies are fully valued, with their respective growth rates over the next couple of years not being strong enough to merit their current valuations. And, with Capita’s bottom line due to grow by 8% per annum during the next two years, and Berendsen’s set to flat line this year before growing by 7% next year, they appear to lack a clear catalyst to push their share prices higher.
Meanwhile, it is a similar story for Quindell (LSE: QPP). Even if its shares were not suspended, it does not appear to be the right time to buy it. That’s because it continues to endure a number of challenges that are likely to dent investor sentiment moving forward. For example, it was unable to release its accounts within the required time limit and is now potentially facing a major lawsuit by disgruntled investors. Both of these problems are likely to cause investor confidence in the business and its new management team to deteriorate.
In addition, there are also doubts regarding it being the right company to buy, since we do not know in which specific direction the company will go, with its new strategy following the sale of its professional services divisions yet to be ironed out. Certainly, its other assets may have potential to deliver high levels of profit, but as things stand, investors are very much in the dark on this issue.
Therefore, while Capita and Berendsen may be worth buying following pullbacks in their share prices, Quindell seems to be a company that needs to prove itself as a business first before it can be decided as to whether or not it is the right time to add it to Foolish portfolios.