While it is always tempting to follow other investors and buy shares in fast-growing companies, being a contrarian investor could be more profitable. It may allow you to buy shares which are unpopular, thereby providing significant upward re-rating prospects. Similarly, it may mean you avoid stocks which prove to be somewhat overvalued. Reporting on Wednesday was a company which, while among the top performers for the day, may prove to be a disappointing investment in the long run.
Upbeat outlook
That company is events specialist UBM (LSE: UBM). It reported better than expected results for the 2016 financial year on Wednesday. Its continuing revenue increased by over 12%, while continuing adjusted operating profit was 19.2% higher. This shows that the company is performing well following the disposal of PR Newswire and the acquisition of Allworld Exhibitions. This has refocused the company on the business-to-business (B2B) events sector, which seems to offer significant growth potential.
In fact, in the current financial year UBM is expected to record a rise in its earnings of 22%. This is around four times the expected growth rate of the wider index. Clearly, there is scope for a difficult period for the global economy, but UBM believes that the integration of Allworld could have a positive impact on its bottom line. Furthermore, it believes that its current strategy will drive margin improvement, which would help to offset any pressure on sales over the coming year.
Valuation
Despite its impressive performance and upbeat outlook for 2017, UBM’s valuation appears to price in its future potential. For example, in the 2018 financial year it is expected to record a rise in earnings of just 3%. Using its current price-to-earnings (P/E) ratio of 19, this equates to a price-to-earnings growth (PEG) ratio of around 6.3. This indicates that while its shares may be popular at the present time, they could lack upside potential over a longer term timeframe.
That’s especially the case when UBM’s sector peer WPP (LSE: WPP) trades on a P/E ratio of 16.9 and is forecast to increase its earnings by 15% this year and 9% in 2018. This puts it on a PEG ratio of just 1.4, which indicates that it offers substantially more capital gain potential than UBM.
Risks
Furthermore, UBM’s risk profile may be higher than that of its sector peer. It is in the midst of a major restructuring which is turning it into a more concentrated business which focuses on events. While this may lead to higher growth in the long run, it could lead to uncertainty and integration challenges in the short run.
While WPP is likely to engage in M&A activity this year, it has a long history of making acquisitions work. Therefore, its business model may be less risky than that of UBM at the present time. As such, buying the less popular of the two companies (i.e. WPP) may prove to be the best option, in my opinion.