One area that’s often overlooked by stock market investors is the importance of momentum. Companies whose earnings are rising and whose shares are performing well can often deliver big profits for investors.
Rising broker upgrades are a useful way to identify a company that might have strong momentum. Today, I’m going to focus on two companies which have both enjoyed major earnings upgrades over the last few months.
This turnaround is gathering pace
Last year saw a spectacular recovery among big mining stocks. Technical contractors such as Capital Drilling Ltd (LSE: CAPD) also did very well — the group’s shares tripled last year. However, since February, the shares have fallen by 30% from 63p to just 44p. I believe this could be a buying opportunity.
In a trading update this morning, Capital Drilling reported first-half revenue of $62.3m. That’s 49% higher than during the same period last year, and the highest H1 figure since 2013, when the mining downturn started.
Utilisation of the company’s fleet of drilling rigs rose to 56% during the first half, up from 40% during the same period last year. The average revenue from each operating rig rose from $175,000 to $191,000, as customer activity levels improved.
Today’s figures suggest to me that the business is starting to see the benefits of a genuine upturn in the mining cycle. The firm’s customers are starting to spend more on development and exploration, laying the foundations for fresh growth.
Mining analysts expect Capital’s turnaround to continue in 2018, with earnings expected to double to 6 cents per share. This forecast has risen by 15% over the last three months. I wouldn’t be surprised to see a further round of upgrades. Now could be a good time to take a closer look.
Approaching a peak?
Until a few years ago, Burford Capital Limited (LSE: BUR) was a small-cap stock operating in the niche area of litigation financing. It’s now a £1.9bn company.
Burford’s earnings per share have risen by an average of 44% per year since 2011. The firm’s shares have risen by a staggering 745% over the last five years, making this a very profitable buy for long-term shareholders.
2017 is likely to be another successful year. Earnings forecasts of $0.60 per share were recently increased to $0.88 per share, following an increase in the implied value of one of the group’s biggest cases.
If the company does manage to hit forecasts this year, then earnings per share will rise by 66%.
But it’s worth noting that the same analysts who expect profits to rise this year believe that they will fall in 2018. The latest consensus forecasts suggest that the group’s earnings will fall by 19% next year.
The question for shareholders is whether this is a short-term blip, or a sign that Burford’s growth may be reaching a peak. As things stand, the stock doesn’t look especially expensive, on a 2018 forecast P/E of 16.5.
However, if the company’s is forced to reduce its earnings guidance for any reason, the shares could fall sharply. If I happened to be a Burford shareholder, I’d probably continue to hold. But I wouldn’t buy any more at current levels.