Why I’d sell Versarien plc and this overpriced growth share

These companies are great operations, but not worth their current price, thinks one Fool.

| 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.

Shares in specialist touchscreen manufacturer Zytronic (LSE: ZYT) fell 2% in early trading this morning after posting results that were slightly ahead of market expectations, perhaps indicating that the shares are overpriced. 

I’ve closely followed the company for years now because the unique intellectual property that it has created since the late 1990s helps it earn outstanding returns. The company has averaged roughly 19% return on capital over the last five years, while operating margins last year peaked at a whopping 23.7%.

The group’s operational gearing meant that a 9% revenue increase in 2017 turned into a 27% jump in profit before tax. In all, it made £4.6m profit last year, leaving the shares on a P/E of 17.5. 

Low visibility warning

This might seem a bargain given that huge step forward in profits, but Zytronic hasn’t got the best visibility on sales and I believe it is possible it will experience a bad year that could significantly knock the share price. 

This happened back in 2013, where poor orders saw profits slide from £3.3m to £1.7m, sending the shares tumbling. While I believe it is a great business, the market has a short memory. I think investors would be best off waiting for one of these down years to purchase the shares. Those that got in at the bottom in 2013 are now up over 200% before dividends.

For truly long-term investors who are willing to weather some share price volatility, however, I believe now could be a good entry point. The company’s 3.7% yield is nicely covered by cash flow and should survive a bad year or two given the £14m cash on the balance sheet. 

There are certainly worse buys out there than Zytronic right now, but I’ll bide my time for a lower shower price before initiating a position. 

Patent-protected, profit-free

Shares in Versarien Technologies (LSE: VRS) shot up from 14.5p to 80p after releasing interim results in November. The company’s expertise in advanced materials with thermal management properties has clearly chimed with investors and customers alike, with revenues jumping 167% to £4.38m in the first half. 

Despite this progress, I wont be investing in the company for a few reasons. Firstly, I find it hard to tell whether its products are truly unique enough to deliver long-term, market-beating returns. I’m no scientist or engineer, after all, and many companies have struggled to turn a profit from graphene. Secondly, Versarien is not profitable, although it admittedly is taking solid steps towards break-even. Losses before tax halved in H1 to £0.77m. 

Given its rapid growth, I imagine the company will be profitable in a year or two. A successful placing in November has also raised £2.8m net of expenses, so the balance sheet looks secure for now. 

I believe that Versarien has a great shot at becoming a soundly profitable business, but it’s market cap is a massive £108m. That seems quite optimistic given its £1m cash burn in the first half.

I’m not in the business of making speculative investments and, in my opinion, the current valuation would have to come down considerably before I’d consider taking a position in the company. Perhaps I’ll be interested after the company publishes further details on the deal it has signed with two large consumer goods companies, but until then I’ll remain a little wary given the valuation.

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.

Zach Coffell has no positions in any shares mentioned. The Motley Fool UK has no position in any of the 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

Happy young plus size woman sitting at kitchen table and watching tv series on tablet computer
Investing Articles

Could Raspberry Pi shares hit £5 by 2030?

After a strong start out of the blocks this month, our writer asks whether Raspberry Pi shares could move further…

Read more »

Close-up of British bank notes
Investing Articles

Five 5%+ yielders I’d buy for an ISA today!

Our writer identifies a handful of FTSE 100 and FTSE 250 firms each yielding at least 5% he'd happily buy…

Read more »

Front view photo of a woman using digital tablet in London
Investing Articles

5 stocks with 5%+ yields I’d love to buy and hold in a Stocks and Shares ISA

Harvey Jones is keen to add these five FTSE 100 high-yielders to his Stocks and Shares ISA, ideally before they…

Read more »

A young Asian woman holding up her index finger
Investing Articles

I’d target £880 of passive income annually, spending £10K now on this FTSE 100 share

Our writer explains how he would add to his diversified portfolio happily by investing in this FTSE 100 passive income…

Read more »

Light trails from traffic moving down The Mound in central Edinburgh, Scotland during December
Investing Articles

3 reasons I think the Scottish Mortgage share price could keep rising

Christopher Ruane explains a trio of reasons he thinks the once-mighty Scottish Mortgage share price could be set to increase…

Read more »

Syringe and vial on blue background
Investing Articles

Is this forgotten FTSE share about to make investors rich all over again?

Not long ago, this FTSE share was all the rage before demand dropped off and things went south. Is it…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

I’d use these 5 Warren Buffett approaches to build wealth

Christopher Ruane outlines a handful of investing lessons from billionaire Warren Buffett that he thinks can help a small investor…

Read more »

US Stock

Nvidia stock: 3 things investors need to know as it surges towards $150

Nvidia is a stock that's had an extraordinary run in 2024. Edward Sheldon highlights some important things investors should know.

Read more »