When a company’s share price hits new highs, what are investors supposed to do? Do they sell their shares for fear of a market correction, or do they hang on hoping that momentum will carry them higher still and onto bigger profits?
Nosebleed
The answer is neither. Now don’t get me wrong, the majority of stock market traders will sit in one of the two camps mentioned above and will practice their art accordingly. But here at The Motley Fool we’re not short-term traders, we’re here to help you build wealth for the longer term, and hence we’re happy to ride out short-term market fluctuations and concentrate on a company’s prospects over a much longer timeframe.
With this in mind, I recently noticed two London-listed mid-cap firms currently in so-called nosebleed territory, leaving investors with the conundrum of whether to buy, sell, or hold. The first of these is Oxfordshire-based cyber security firm Sophos Group (LSE: SOPH). The mid-cap firm has been enjoying the spotlight ever since the WannaCry ransomware attack in May which hit organisations across the globe, including our very own National Health Service.
Cyber welfare
Quite understandably, the importance of cyber security has since come to the nation’s attention with Sophos and its peers likely to benefit from increased cyber defence spending by small businesses all the way up to national governments. Consequently, the group’s share price has been setting new all-time highs over the past few weeks with the shares now trading at almost double their 2015 IPO price of 225p.
There’s no doubt that firms such as Sophos will see an increase in demand in the coming years as more and more of our data is held ‘securely’ up in the cloud as well as on our own personal devices. The long-term outlook is indeed excellent and the market has certainly taken notice of the invaluable contribution that these firms can make to our cyber welfare. But let’s not get too carried away. At 104 times forecast earnings for FY2018 the share price now looks very overstretched, which would lead me to place a ‘hold’ rating on the in-favour-but-rather-expensive stock.
High flyer
Another FTSE 250 firm enjoying its time in the sun is private healthcare provider NMC Health (LSE: NMC). Like its high-flying counterpart Sophos, NMC has enjoyed a healthy share price rally over the past few months with its shares continuing to surge ahead and set new all-time highs over and over again.
The United Arab Emirates’ leading integrated healthcare provider is set to benefit hugely from the completion of mandatory healthcare insurance in Dubai earlier this year, with City analysts predicting nothing less than double-digit earnings growth for the foreseeable future.
But like Sophos, I believe the market has already priced-in the bright outlook, leaving the shares trading on a not-so-cheap P/E rating of 28 for the current year to December. Again, I don’t think investors should get too carried away and I would rate the shares a ‘hold’ for the time being.
