How do you know when a successful investment has run its course and it’s time to sell?
If you’ve doubled your money, it’s tempting to lock in some profits and sell. Yet as today’s shares illustrate, selling your winners can be a costly mistake.
In this article, I’ll explain why multi-bagging stocks ITV (LSE: ITV), Berkeley Group Holdings (LSE: BKG) and Redde (LSE: REDD) could still have more to offer investors.
ITV
Shares in ITV have quadrupled in value over the last four years, delivering a profit of 300% plus dividends for shareholders.
Although the shares have pulled back from a 52-week high of 282p, ITV’s latest results suggest to me that this stock could recover strongly from the current market correction, and deliver further gains.
During the first half of the current year, ITV’s revenue rose by 11% to £1.4bn, while adjusted pre-tax profit rose by 25% to £391m. Current forecasts suggest that the full-year dividend will rise by a massive 54% to 7.2p, giving a prospective yield of 3.0%. This yield is expected to rise to 3.6% in 2016.
Of course, there are risks. ITV has been spending heavily on buying the small production companies that make many of its most successful programmes. Profits from these programmes are offsetting falling advertising revenues, but they need to continue producing hit shows.
Overall, I believe the outlook remains fairly bright for ITV. With a 2016 forecast P/E of just 14, this could still be a profitable buy.
Berkeley Group
Housebuilder Berkeley has a key advantage over many of its peers: founder and chairman Anthony Pidgley has proved very skilled at timing the market.
Berkeley shares have risen by 305% over the last five years, as the firm’s focus on London and the south east has generated consistently strong profits.
Today, Berkeley is in the middle of a cash return programme that will see the firm return 433p per share to shareholders by September 2018, and a further 433p per share by September 2021. In total, that’s 25% of the current share price.
Analysts remain bullish and have increased their forecasts for 2016/17 earnings per share by 83p, or 28%, to 371p over the last three months.
Berkeley generated an operating margin of almost 25% in 2015 and remains free of debt, unlike some of its peers, which have started borrowing money to build up their land banks.
In my view, Berkeley remains a class act that could yet deliver further gains. I certainly wouldn’t sell at this time.
Redde
Formerly known as Helphire Group, Redde is an accident management company which provides courtesy cars and repair management services for car insurance companies.
Redde shares have risen by 140% over the last year, during which analysts’ estimates for next year’s earnings have risen steadily, from 6.3p to 8.8p.
Yesterday’s 2014/15 full-year results seemed to justify this confidence. Adjusted earnings per share were up by 12.4% to 8.4p, while the total dividend rose by 20% to 8.25p, giving a yield of 5.3%.
That payout was backed by free cash flow, suggesting that this is a genuinely profitable and cash-generative business. On a 2015/16 forecast P/E of 17, Redde shares aren’t cheap, but a generous cash-backed yield and strong management credibility suggest that these shares could deliver further gains.