Lancashire Holdings (LSE: LRE) is trading at its 52-week high today, while Serco (LSE: SRP), Kenmare Resources (LSE: KMR), and Xtract Energy (LSE: XTR) are also outperforming the FTSE 100, which was up 1.9% around midday.
So, should you ever consider an investment in any of these four companies?
Lancashire Looks Overvalued
The shares of Lancashire are surging 6% today, as the valuation of the insurer benefits from the £3.4bn cash offer that has been put forward by Japan’s Mitsui Sumitomo Insurance Company for reinsurer Amlin of the UK.
While there is talk that Lancashire , whose stock is up 23% year to date, could also attract interest from suitors, I am more focussed on fundamentals and trading multiples — neither of which suggest that its share are a compelling buy right now.
Serco is not cheap enough
I’d also be very cautious with Serco, whose valuation was up 4% at the time of writing, if for very different reasons. Serco has gone through torrid times in the last couple of years, with its shares down over 50% in the last 12 months.
This is an outsourcing business that breached covenants on its debts and had to seek help from its shareholders to stay afloat — its trading multiples now suggest that Serco could be overvalued by at least 40%, unless management proves that it can preserve margins and deliver a higher level profitability, in my view.
Its shares are rising today along with the market, but they still trade at their one-year lows. Frankly, I’d look elsewhere for value.
Kenmare Resources: who’s right?
Kenmare isn’t particularly enticing, either, the bears argue — yet this is not an easy call. Its stock was up over 6% in early trade, but has given up some of its gains since.
On the one hand, its valuation has fallen over 70% in the last 12 months, and you’d be buying the shares of a miner that is highly unlikely to be profitable for at least a year and whose balance sheet arguably carries too much debt (net debt stands at about $300m).
On the other, problems with production and industrial action have gone hand-in-hand in recent times, but these issues won’t affect its performance to the end of 2015 and beyond, the bulls could argue. Moreover, Kenmare managed to refinance its debts earlier this year and it has been targeted for months by Australian mineral sands producer Iluka Resources.
Still, I am looking for less risky options in the sector. How about Xtract Energy, for instance?
Xtract: a defensive play?
If you are eager to take an opportunistic bet on gold, Xtract could well be the name for you.
It’s possible that the group — whose shares trade at 0.27p, having surged 12.5% so far today — will ask shareholders to back its funding plans, but then I think that dilution risk could have a minimal impact on its share price at these levels.
The obvious warning is that we have little visibility on financials and trading multiples, while its pipeline of projects has yet to deliver. You’d add volatility to your portfolio with XTR, but consider that anybody who had bought it in early January would have recorded an 84% paper gain.
