Last month’s soaring shares are set to slump!

Bilaal Mohamed explains why two of last month’s winners could be heading for a fall.

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Sports-fashion retailer JD Sports (LSE: JD) has enjoyed phenomenal success in recent years with sales revenue on an upward curve since the start of the millennium and the share price multiplying a staggering tenfold in the last five years alone. New investors keen on the firm could be forgiven for thinking they’ve well and truly missed the boat on this one. But is that necessarily true, or is there more to come from JD?

Look before you leap

The Bury-based retailer reported another record first half last month when it announced its interim results for the 26 weeks to 30 July. Revenue for the period was up an impressive 20% to £971m, with operating profit before exceptional items up 63% to £77.7m. The increase in pre-tax profits was equally impressive, as they surged ahead 73% to £77.4m, with gross margins reaching 48.1%, compared to 47.4% reported for the same period a year earlier.

JD’s financial year ends on 31 January 2017, and the City is expecting the FTSE 250 firm to report double-digit earnings growth to the tune of 26% for the full year, with a further 10% increase forecast for FY2018. However, after yet another strong rally last month, JD’s shares are looking ever-more-expensive, with the company’s price-to-earnings ratio rising to 19 times forward earnings. I believe a big market correction could be on the cards soon, and new investors should sit on the sidelines and wait for a more favourable entry point before jumping in to JD.

Weir waiting for the inevitable?

Another London-listed firm enjoying a good September was engineering business Weir Group (LSE: WEIR). Shares in the Scottish firm have more-than-doubled since the start of February this year, with the 11% surge last month just adding to the already impressive gains. Can this rally continue until the end of the year, or are we just waiting for gravity to pull the shares back to where they belong?

The Glasgow-based group announced on Monday that it had promoted John Heasley, managing director of its Flow Control Unit to Chief Financial Officer, after his predecessor Jon Stanton moved up to become the group’ s new chief executive. This follows the announcement in July that CEO Keith Cochrane was stepping down after the firm reported a significant drop in first-half profits. In the six months to 30 June, profit before tax fell 25% to £82m, with revenues declining 12% as a result of weaker oil prices.

Sadly, our friends in the City don’t expect a second half turnaround for Weir, as consensus estimates suggest a 16% decline in underlying profits for the whole of 2016, with revenues expected to nosedive to £1.83bn. After this year’s share price outperformance, Weir looks pretty expensive at 27 times forecast earnings for 2016, and could be heading for an ever-more-likely slump by the end of the year.

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 considered so you should consider taking independent financial advice.

Bilaal Mohamed has no position in any shares mentioned. The Motley Fool UK has recommended Weir. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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