Two super growth stocks I’d dump today

These two stocks have been rattling along but Harvey Jones wants to jump off the bandwagon.

| 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.

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.

Deciding when to sell a stock is as tricky as working out the right time to buy one. However, I don’t think the decision is so difficult with these two companies. If I held either of them, I would dump them today

Pure food

E-tailer Ocado Group (LSE: OCDO) calls itself the world’s largest dedicated online grocery with almost 600,000 customers. It has ambitious plans to cash in on the booming market for Britons to do their weekly shop online, which is set to make up 9% of the £179bn grocery market by 2021, up from 6% today.

Its rapid share price growth reflects this opportunity, with the stock soaring 206% over the past five years. This figure is rather flattering, as it masks three years of decline dating from 2013, but the recovery is under way, with the stock up 25% in the last six months. Some have been excited by talk of a mooted tie-up with Marks & Spencer, although this is far from settled at the moment.

A bit pricey

Ocado has certainly been motoring, boosted by existing supplier relationships with Waitrose and Morrisons, with sales up 13.6% last year to £1.267bn and profit before tax and exceptional items up 21.8% to £14.5m. Although debt widened from £127m to £164.9m, the balance sheet remains strong.

The company is no disaster but trading at a whopping 157 times earnings – and forecast to hit 342 times – you would hope that its growth prospects would be stronger. Worryingly, earnings per share (EPS) are forecast to drop 48% in the year to 30 November 2017, although they may rebound 34% the year after. With consumer confidence weak, the economy slowing, and food inflation still relatively high, this stock is way too expensive for me.

More reasons

It now seems a long time since Morrisons (LSE: MRW) suffered what once looked like a terminal meltdown. The stock has been booming lately, its share price up 45% over two years, and 25% over the past 12 months. I would never have guessed.

I certainly didn’t expect such a dramatic rebound as German budget chains Aldi and Lidl continue to make inroads, customer wages continue to stagnate, and sentiment continues to decline. However, management has overhauled the business successfully, driving down costs and using keen pricing to reduce market share losses.

German inroads

Sales in the 12 weeks ending 21 May 2017 rose 1.9%, beating both Tesco at 1.8% and Sainsbury’s at 1.7%, according to latest figures from Kantar Worldpanel. However, Aldi and Lidl’s sales growth was almost 20%, that’s 10 times as high, lifting their joint market share to a record 12%. Morrison saw its market share fall two percentage points to 10.5 points. Hardly disastrous, but the direction of travel is still wrong.

I swept the supermarkets out of my portfolio several years ago and I still see little reason to return to the fray. Perhaps I am being hard on Morrisons, with its EPS forecast to rise an impressive 18% in the year to 31 January 2018, followed by another 6% after that. The dividend is slowly being restored, with a current yield of 2.2% covered twice. However, trading at 22.5 times earnings, this remains a tough play in a tough sector.

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.

Harvey Jones has no position in any shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

2 recession-resistant UK stocks I’d buy and hold for a decade!

Our writer details two UK stocks she believes could still continue to perform well in a recession and not feel…

Read more »

Back view of blue NIO EP9 electric vehicle
Investing Articles

Down 31% this year! Is now the moment to buy NIO stock?

NIO stock has moved sharply downwards in the past couple of months. Christopher Ruane likes the business potential -- but…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

2 dividend stocks I reckon could grow payouts for years to come!

This Fool is looking for dividend stocks and explains why these two picks could be primed to grow their payouts…

Read more »

Arrow symbol glowing amid black arrow symbols on black background.
Investing Articles

Should I buy, sell, or hold my Rolls-Royce shares at £3.50?

This Fool considers what he should do with his Rolls-Royce shares following the FTSE 100 company's excellent full-year results last…

Read more »

Couple working from home while daughter watches video on smartphone with headphones on
Investing Articles

With a spare £280, here’s how I’d start buying shares this March

Our writer reflects on what he has learnt on the stock market to explain how he would start buying shares…

Read more »

Businesswoman calculating finances in an office
Investing Articles

Are these expensive FTSE 100 stocks actually brilliant bargains?

Paul Summers takes a closer look at two FTSE 100 stocks that could recover strongly in time, despite already carrying…

Read more »

Investing Articles

What might the recent Aviva share price performance tell me as an investor?

Christopher Ruane looks at how the Aviva share price has performed over the past 12 months and considers whether he…

Read more »

Investing Articles

Down by a quarter, is the BT share price a steal?

The BT share price has more than halved in the past five years. What is holding it down -- and…

Read more »