Could these top-performing stocks be about to collapse?

Bilaal Mohamed considers whether these shares are heading for a correction after this year’s spectacular gains.

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International veterinary drugs business Dechra Pharmaceuticals (LSE: DPH) has been one of the top performers in the FTSE 250 this year, its shares continuing a strong rally that began way back in 2003. Over the same 13-year period the company’s share price has soared from 43p to today’s levels of 1,287p as the firm has expanded into a worldwide business with a market value of around £1.2bn. But after soaring 33% over the past 12 months and hitting new all-time highs in October, is Dechra in danger of a massive share price correction?

Perhaps. But in my opinion it won’t be too long before savvy investors scoop up the shares and send them back heading north. Why? Because for me what makes the business such an attractive investment is the fact that the majority of its products are used to treat medical conditions for which there’s no other effective solution. Or they have a clinical or dosing advantage over competitors’ products. That should be music to the ears of potential investors.

Cats and dogs

In its most recent statement, management confirmed that its first quarter performance was in line with expectations and that all its recent acquisitions were performing well. That includes its most recent £31.3m purchase of Sydney-based Apex Laboratories, which sells branded animal products in Australia and New Zealand. Apex will provide Dechra with access to the Australian pet market, which has around 4.2m dogs and 3.3m cats and includes a new manufacturing facility and a development pipeline.

I can’t see any let-up in Dechra’s growth, as animal welfare is taken more seriously worldwide, and the group continues to launch new products and expand its geographical reach. Dechra continues to outperform in the majority of therapeutic areas and markets in which it trades, especially in the US. For me Dechra continues to be a good long-term buy given its growth potential, but with a premium price-to-earnings ratio of 25 for FY2017, I would suggest investors wait for the next big retracement before buying.

Recurring income

Another mid-cap firm that’s been outperforming this year is specialised technical products group Diploma (LSE: DPLM), its share price also recording new highs last month. The group, which provides technical products and services to the life sciences, seals and controls industries, focuses on supplying essential products and services that are funded by the customers’ operating budgets rather than their capital budgets, providing recurring income and stable revenue growth.

Over the last five years Diploma has grown its underlying earnings at an average rate of 15% per year through a combination of acquisitions and organic growth. Management expects revenues for the year just ended 30 September to increase by 14% with acquisitions contributing 8%, and currency effects adding 4% to revenues thanks to the weakness in sterling. In my opinion Diploma is another excellent long-term pick for growth investors, but with a lofty P/E rating of 22, I would sit tight and buy on weakness to gain better value.

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.

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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