Shares with strong momentum often continue climbing for much longer than anyone expects, especially if the underlying fundamentals are also strong.
In today’s article I’ll look at three of last month’s stronger performers. Are more gains likely in April?
These gains are surprising
Ocado Group (LSE: OCDO) shares gained have risen by 29% over the last 30 days, making the online grocer the top performer in the FTSE 350 during that time. Which is strange, as 2016 hasn’t really started all that well for Ocado.
The firm’s UK partner Wm Morrison Supermarkets announced a deal to supply Amazon’s planned UK food delivery service. This was a deal Ocado had hoped for. Ocado was also forced to admit that it had failed to find any new customers for its home delivery service.
In my view, the reality is that Ocado shares look very expensive. The stock has a 2016 forecast P/E of 130, falling to a P/E of 85 in 2017.
City analysts are becoming increasingly cautious. One year ago, they expected Ocado to report earnings of 3.5p per share in 2016. Today, that figure is just 2.6p per share. That’s a 26% decline.
A lot of growth is already priced-into Ocado’s shares, despite this worsening outlook. In my view, now might be a good time to sell.
The next Rightmove?
Auto Trader Group (LSE: AUTO) said this morning that the group’s chief executive and finance director have sold 35.9% of their collective shareholding in the firm. CEO Trevor Mather sold 7.1m shares, worth £26m, while FD Sean Glithero pocketed £5.9m from the sale of 1.6m shares.
It’s unsurprising that the two men who led Auto Trader’s floatation are keen to cash in on some of their gains. I don’t think investors need to be concerned, especially as the men retain shareholdings worth a total of £60m.
In my view, Auto Trader has many of the advantages that have made Rightmove so successful.
According to the firm, its market share is five times larger than the nearest competitor. As a result, Auto Trader has strong pricing power. The group’s average revenue per retailer forecourt rose by 9% during the first half of the year, while its operating margin rose to 60%.
Auto Trader shares trade on 31 times 2016 earnings, falling to 17 times earnings for 2017. This looks reasonable to me.
Bellway
Housebuilder Bellway (LSE: BWY) has been a relatively poor performer in recent years. Shares in the firm have risen by 266% since 2011, compared to 358% for Taylor Wimpey and 405% for Barratt Developments.
Bellway’s 3.6% forecast yield also lags behind the 5% to 6% yields available from most of the other big housebuilders. Despite a booming housing market, Bellway has failed to build up a cash pile. Net debt is actually rising.
The good news is that Bellway’s profits are still growing strongly. Earnings per share are expected to rise by 27% in 2016. The firm’s operating margin has caught up with peers and is now nearly 22%.
If this strong momentum can continue for another couple of years, then Bellway shares could deliver a respectable profit from here. However, in my view it could be too late in the housing cycle for this to be a safe bet.
I rate Bellway as a hold, rather than a buy.