“The trend is your friend until the bend at the end” is true enough, and it lies behind the idea of momentum investing — you stick with a stock while it’s rising, and sell when it turns down.
It’s clearly a nice idea, but you need to be able to get your timing right. If you can’t (and here’s a hint — nobody can, consistently) you could be left sitting on some big losses if the price crashes, and soaring growth stocks can crash quickly.
Software
That’s a large part of the reason I wouldn’t buy Aveva Group (LSE: AVV) shares now, after their remarkable 97% rise so far in 2019 (and I know there’s only a day to go but I don’t want to tempt fate, so I’ll stick with ‘so far’).
The company develops software for engineering and industrial businesses, and we know how software companies can soar in value. Aveva has seen revenue and profits climbing over the past few years, and a lot of that revenue is recurring due to the way the company charges. It’s also been expanding its new sales too, and is clearly doing very well.
So, I’ve nothing against Aveva as a business — it’s just the kind of great business that even Warren Buffett might like, if he went for high tech stocks. In fact, he’s noted for suggesting you should strive to buy a wonderful company at a fair price. But that’s my problem — I just don’t see today’s Aveva price as a fair one.
As well as 2019’s gains, Aveva shares are up 260% over five years, so I really wish I’d bought some back then. But that rise has pushed them to a P/E multiple of nearly 44 based on expectations for the year ending March 2020, and with EPS predicted to grow by an unexciting 18%, dropping to 14% for the following year, I just think that’s too expensive.
Safety
Something similar has happened to Halma (LSE: HLMA), whose share price has gained an only slightly less impressive 60% in 2019 — and 213% in five years.
The company is also in a high-tech business, specialising in safety, medical, and environmental technology, and a number of worldwide developments are helping drive its business.
Halma’s earnings have been growing steadily, though at a slower rate than Aveva’s in the past couple of years. But the share price has climbed ahead of that, pushing the P/E up from around 22 in 2015 to a forecast 37 for the current year (again to March 2020). While Halma is in another market that’s likely to see strong demand over the long term, again I think the share price has got too far ahead of itself. So this is another I see as overvalued now and another I’ll pass up on.
Buying Halma based just on momentum would have been successful in recent years, but the problem with a rising trend, as always, is knowing for how long it will rise. Been climbing for 12 months? I’ve seen stocks crash after 13 months. Five years of steady gains? I’ve seen them crash in year six.
Again, I think this is a potentially wonderful company, but again I’m not seeing an attractive share price.