Why I’d wait before buying these 2 shares

Bilaal Mohamed explains why investors should stay away from these shares for the time being.

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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.

British speciality chemicals firm Croda International (LSE: CRDA) has enjoyed a good run of success in recent years with annual revenues now surpassing the magic £1bn mark and pre-tax profits exceeding £250m. The FTSE 100 company may not be a familiar name on the high street but its products have countless domestic and industrial applications. The company’s profits and consequently its market value have continued to grow at a steady pace with the share price reaching new all-time highs earlier this month. So is it too late to join the party, or does Croda still offer good value for new investors?

Sterling performance

The Yorkshire-based chemicals giant posted an encouraging set of interim results earlier this year and further confirmed that it remained on track to meet full-year expectations. Pre-tax profits grew 7% to £145.1m for the first half of the year on higher revenues of £608.7m, compared to £564.5m reported for the same period a year earlier. Croda’s Life Sciences unit put in a particularly good performance with its Performance Technology and Personal Care divisions also performing well as a result of the recent weakness in the value of the pound.

Full-year results should continue to benefit from sterling weakness as 95% of the company’s sales and 80% of production resides outside of the UK. Croda’s shares have enjoyed a strong rally this year particularly after the EU referendum and are trading 23% higher than before the historic vote. This leaves the shares on an expensive-looking earnings multiple of 24 for the current year, well above the normal range for Croda, with a possible market correction looming.

There’s no denying that Croda is a quality company but I would suggest keen investors wait for a dip in the price, and buy on weakness to gain a more favourable valuation.

Wait for it

Another firm riding high at the moment is business services firm Rentokil Initial (LSE: RTO,) with its share price recently climbing to its highest level in 14 years. Although the Rentokil name has always been associated with pest control, there’s a whole lot more to this worldwide company including hygiene services, specialist workwear and textiles, to name but a few. The company’s future looks very bright with strong growth predicted in the coming years, but does this come at too high a price for would-be investors?

In its most recent update last week, the Camberley-based firm reported strong figures for the third quarter of its financial year, helped by an excellent performance at its pest control business, and of course the weaker pound. Total revenue for the three months to the end of September jumped 32% to £578.3m with the company’s large exposure to the US market being helped along by our battered currency. Rentokil’s shares have gained a staggering 56% over the past 12 months, leaving them looking overstretched at 23 times forecast earnings.

Like Croda, Rentokil has lots of appeal but is just too expensive at the moment. Again, I would suggest anyone interested waits for the next pullback before buying.

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 no position in any of the shares mentioned. 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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