One growth stock I’d buy and one I’d sell in February

G A Chester reveals one mid-cap he’d buy and one he’d sell.

| More on:

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.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Weighing up whether a company’s prospects justify its valuation isn’t always easy when it comes to businesses that are growing at a fast rate.  However, of the two growth stocks I’m looking at today, I feel confident enough to rate one a ‘buy’ and one a ‘sell’.

Bright future

I’m convinced that FTSE 250 respiratory drugs and devices group Vectura (LSE: VEC) has a bright future, as both a business and an investment.

Vectura merged with Skyepharma last June and the increased scale and breadth of the group give it the potential to develop into a respiratory powerhouse, as it competes across all the major respiratory classes.

In a pre-close trading update earlier this month, the company said that revenue for 2016 is anticipated to be in line with the board’s expectations and that positive momentum from seven key recently-launched inhaled products provides a strong base for recurring revenue. Chief executive James Ward-Lilley also reported “significant progress” with the company’s pipeline of products.

Vectura’s 2016 financial year is a shortened one of nine months as, since the merger with Skyepharma, it’s changed its year-end to 31 December, to align with its partners and peers. As such, I look to the forecast financials for the full-years 2017 and 2018 for my valuation. At a share price of 130p, these give a P/E of 16.6, falling to 10.9 and a P/E-to-growth (PEG) ratio of 0.2, which offers tremendous value.

Based on the attractive valuation and long-term demographics of ageing populations in the developed world and rising prosperity and demand for healthcare in emerging markets, I rate Vectura a ‘buy’.

Overvalued?

AO World (LSE: AO) has come along way under founder and chief executive John Roberts since he bet a friend a pound that he could change the way white goods are purchased via the Internet, way back in 2000.

The company is well-managed, has grown rapidly in the UK, is expanding into Germany and the Netherlands, and says its “on a mission to become a leading European online retailer of electrical products”.

But — yes, there is a but — the company is still forecast to be loss-making for its financial year ending 31 March. For fiscal 2018, the forecast is for pre-tax profit of just £3.7m on turnover £860m and while profit is forecast to rise to £16.1m for fiscal 2019, it will take a whopping £1,018m of turnover to produce it.

In other words, this is a low-margin industry, which doesn’t appeal to me as an investor. Small profits can easily swing to large losses when margins are thin, whether due to the company making a misstep or external forces beyond management’s control.

And speaking of external forces, the company said in a third-quarter trading update earlier this month that while it expects full-year performance to be within its previous guidance, it’s “cautious about the final quarter given the uncertain UK economic outlook, currency impacts on supplier pricing and the possible effect on consumer demand”.

Based on the potential for AO World to suffer a setback at some point in its expansion and a sky high valuation (a P/E of 245 for 2018 and 53 for 2019), I rate the shares a ‘sell’ at a current price of 159p.

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.

G A Chester 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.

More on Investing Articles

Bronze bull and bear figurines
Investing Articles

US stock market: the winners and losers one week after the election

Last week's US election spurred big moves in the US stock market, with some global indexes making record highs. Here's…

Read more »

Investing Articles

The latest FTSE dip has handed me a brilliant opportunity to buy cheap shares!

Harvey Jones is on a mission to take advantage of the recent FTSE 100 dip by going shopping for cheap…

Read more »

Investing Articles

After falling 13% this ultra-high-income share yields 7.25% with a P/E of just 10.1!

Harvey Jones couldn't resist buying this FTSE income share. He thought it looked great value in September and it's even…

Read more »

The flag of the United States of America flying in front of the Capitol building
Growth Shares

2 FTSE 100 stocks that could soar while Donald Trump is US President

These two FTSE 100 companies have a lot of exposure to North America. So, they stand to benefit from a…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

£9,000 of savings? Here’s how I’d aim to turn that into £5,832 a year of passive income!

Smaller initial investments in high-yielding stocks can generate much greater passive income over time, especially if dividend compounding is used.

Read more »

Investing Articles

Will the Lloyds share price drop to 50p in 2025 and should I buy the stock if it does?

The Lloyds share price has fallen 12% in six weeks, making the stock cheaper on a price-to-book basis than NatWest.…

Read more »

Investing Articles

As BT’s share price drops 8%, should I buy more?

BT’s share price looks a bargain to me on several key stock measurements, offering a high yield as well, supported…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

After falling 87% in 45 months, could Dr Martens be a winning value stock?

Ahead of its half-year results due to be released later this month, our writer considers whether this FTSE 250 icon…

Read more »