One of the secrets behind the wealth of many well-known investors is that they had one or two really big successes early in their investing careers.
In this article I’ll ask whether Optimal Payments (LSE: OPAY), Tullow Oil (LSE: TLW) or International Consolidated Airlines Group (LSE: IAG) could deliver the kind of big gains required to help fund an early retirement.
Sales at online payment processor Optimal Payments have risen by an average of 42% every year since 2009. The firm’s shares are worth 500% more than five years ago. However, Optimal’s stock market performance has become more uncertain this year.
Personally, I think it’s probably too late to hope for more multi-bagging gains from Optimal. Although the firm has a good record of generating free cash flow, the recent acquisition of Skrill has left Optimal with €500m of debt. That’s more than five times this year’s forecast post-tax profits of $93m.
I also suspect that Optimal’s profit margins will come under increased pressure from peers such as Apple Pay over the next few years.
Optimal shares currently trade on a 2015 forecast P/E of 18, falling to 13 in 2016. That’s not cheap enough to be a buy, in my view.
International Consolidated Airlines Group
British Airways owner IAG has had a storming year. The airline group’s shares are 42% higher than 12 months ago. Sales for the first nine months of the year are 13% higher than in 2014.
The shares are still tempting, too. IAG stock currently trades on a 2015 forecast P/E of about 11. The latest forecasts suggest earnings per share could rise by a further 28% in 2016, giving a 2016 forecast P/E of just 9.
Does this make IAG a strong buy? Perhaps. Ownership of three major European airlines means that IAG benefits from economies of scale and good access to attractive routes. Current low oil prices should mean that the group can lock in low fuel prices for several more years.
On the other hand, the airline business is cyclical. IAG’s gearing is now 49% and adjusted net debt is €7.1bn. While growth appears to be strong at the moment, any downturn could put severe pressure on IAG’s profits.
IAG could well deliver more gains for investors, but at nearly 600p I don’t think the shares are an outright bargain.
Tullow’s 52% plunge over the past year has seen the oil exploration and production firm ejected from the FTSE 100. Tullow shares are now worth 85% less than when they peaked at 1,566p in February 2012.
Does this make Tullow cheap? Not necessarily. Tullow’s valuation needs to be looked at in the context of its sizeable debt burden. At the end of June, Tullow’s net debt had risen to $3.6bn (£2.3bn). That’s significantly more than the firm’s £1.8bn market cap.
Tullow won’t run out of cash. The group recently renewed its credit facilities and has $2.1bn in cash and undrawn credit facilities. The problem is that low oil prices mean this debt, which is being used to fund the TEN project, will take longer to repay than expected.
I’m not convinced that there will be much spare cash flow available to return to shareholders for the next few years. Tullow remains a risky buy, in my view.