Two ‘overvalued’ stocks I would buy today

Harvey Jones doesn’t often tip stocks trading at more than 60 times earnings, but there are exceptions.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

As a rule, I zone in on undervalued companies, while shunning those with whoppingly high valuations. However, there are exceptions to every rule.

Sophos, so good

You wouldn’t describe security software and hardware company Sophos Group (LSE: SOPH) as cheap, trading at a mighty 61.33 times earnings. So does it merit that sky-high valuation? 

Sophos sells complete IT security to more than 100m users in 150 countries, giving them end-to-end protection against complex threats and data loss. Its offers security solutions backed by its global threat analysis centre SophosLabs, which provides real-time cloud-enabled security intelligence.

The FTSE 250 company has had a barnstorming 12 months, its share price soaring 80% to 405p, which partly explains why the valuation is so high. It enjoyed a strong year to 31 March, with reported billings up 18.2% to $632.1m, and the board reporting “strong” momentum across all regions and products. The recent ransomware cyber attacks will only have boosted its profile. In fact, it mentions them in its online advertising.

On the attack

The £1.87bn company is enjoying “exceptionally strong” unlevered cash flow growth, which almost tripled to $133.4m, and has posted impressive gains in market share. Despite this, its operating loss widened over the year, largely due to cost increases associated with the strong growth in billings, as most of its revenues are deferred. However, with those deferred revenues growing 16.5% to $581m, future revenue visibility is increasing.

Sophos hiked the total dividend 156% to 4.6 cents, although the current yield is just 0.91%. The question is: when will it start making money? In the last three years, it posted losses of $54.3m, $68.4m and $49.3m, but this is forecast to turn into a profit of $34.22m in the year to 31 March 2018, then rise to $44.62m the year after. Three years of double-digit negative earnings per share (EPS) growth are forecast to reverse in the year to March 2018, with a 27% rise. This is a tempting long-term growth play, despite that pricey valuation. Cyber threats are only going to grow.

Electric Avenue

Here’s another FTSE 250-listed company trading at more than 60 times earnings, real estate investment trust Shaftesbury (LSE: SHB). It invests in property in London’s West End, and aims to produce sustainable capital growth and dividend income from its portfolio. This has built up over 30 years and includes restaurants, leisure and retail in world-renowned locations such as Carnaby, Soho, Chinatown and Covent Garden. Its 583 restaurants, cafés, pubs and shops extend to 1.1m square feet and provide 70% of current income.

It should therefore benefit from London’s status as a global tourist hub, as well as the rising and relatively affluent population across London and the South East. Its heady valuation of 68.71 times is eased by the 27.8% rise in profits after tax to £102.4m, and the firm’s promising growth prospects. EPS are forecast to rise 18% in the year to 30 September 2017, then another 13% the year after. London has already shown how it can turn Brexit uncertainties to its advantage. The share price has been becalmed lately but that could be a buying opportunity, if you can stand that heady valuation.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »