Why I’d take profits on this stock after returning 350% in 5 years

Could diversification prove to be ‘diworsification’ for this stellar growth share?

| 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.

Image. Photo-Me International. Fair use.

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.

A business that provides photobooths in shopping centres, supermarkets and airports may seem a bit of a dinosaur in this world of smartphones, but Photo-Me International (LSE: PHTM) has navigated this new world with aplomb. Indeed, in the past five years shares of the company are up over 350% as management has doubled operating profits and managed to steadily increase revenue.

Yet after this greatly successful run I reckon now may be time for shareholders to begin taking some profit. The main issue for me is that as management has sought out growth, it has been forced to diversify quite far away from its core photo kiosk business into the likes of operating self-serve launderettes across Europe.

This has kept sales growth marginally positive, 3.3% in constant currency terms over the past year, even as the core photo business has turned into a slowly declining cash cow. But, it also means that investors are being asked to trust management to easily switch focus to rapidly expanding the estate of launderettes and the world of investing is filled with examples of companies struggling to successfully diversify into dramatically different industries.

That said, thus far the expansion into launderettes is going well. The group added 1,000 units in the past year and is a little over half way towards its 2020 goal of having 6,000 in operation across the world. And with a net cash position of £39.2m the company does have a buffer to fall back on.

But with its shares pricey at 18.5 times forward earnings in the midst of a dramatic shift in strategy, I’d be wary if I were a shareholder. Given management’s track record of success I wouldn’t sell my entire holding but locking in some of my gains would be too appealing to pass up at this point.

A sturdier business

Another surprising winner of the past few years is lumber merchant James Latham (LSE: LTHM). Shares of the firm are up nearly 200% over the past five years as the company has invested in growth and taken advantage of rising demand for its goods from homebuilders.

In the year to March, revenue rose 6.9% to £198.8m and operating profits rose by £1m to £13.2m. Like Photo-Me, the company’s management team also takes a conservative approach to its balance sheet. It had a net cash position of £17.2m at year-end and maintained dividend cover at 3.6 times.

However, before would-be investors take the plunge, there are a few things to remember about the timber business. For one, it’s a commodity, which means relatively low margins for suppliers, a shallow moat to entry and few competitive advantages. Of course, demand for timber is also tightly correlated to the health of the domestic building trade so sales and earnings can be highly cyclical.

James Latham is a well-run business with a long history of success. But with a low 1.8% dividend yield, its shares pricey for a commodity supplier at 14.8 times earnings, and the domestic housing market looking to be at or close to peaking, I’d wait for a downturn before beginning a position.

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.

Ian Pierce 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

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 »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

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

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »