Time to ditch this high-flying FTSE 250 growth stock?

This FTSE 250 (INDEXFTSE:MCX) stock had a superb 2017. Should investors take profits and move on?

| 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.

Of all the dilemmas you can experience as an equity investor, deciding when to part company with a winning share can be one of the most difficult. Do you sell your entire holding, bank at least some profit or hold on to everything in the hope of taking full advantage should the stock continue to rise?

This is the conundrum likely to be facing many holders of metrology specialist Renishaw (LSE: RSW). Stock in the Wotton Under Edge-based business more than doubled in price over 2017, even if some of those gains have been given up in recent weeks following the release of its latest set of first-half numbers. 

Inflation Is Coming

Inflation is out of control, and people are running scared. But right now there’s one thing we believe Investors should avoid doing at all costs… and that’s doing nothing. That’s why we’ve put together a special report that uncovers 3 of our top UK and US share ideas to try and best hedge against inflation… and better still, we’re giving it away completely FREE today!

Click here to claim your copy now!

Over the six months to the end of 2017, revenue grew by 20% at constant exchange rates to just under £279.5m with adjusted pre-tax profit rising 73% to £62.3m.

Renishaw saw growth in all of its metrology product lines over the reporting period with its additive manufacturing and measurement and automation lines the standout performers. Elsewhere, the adjusted operating loss of £1.9m in the company’s healthcare business was far better than the £6m loss in the previous year thanks to growth in its spectroscopy and neurological lines.

Clearly in something of a purple patch, the company now expects revenue for the full year to be “in the range of £575m to £605m” and adjusted pre-tax profits to come in somewhere between £127m and £147m. A “further reduction in losses” in the aforementioned healthcare division is also anticipated. 

With a solid balance sheet (£69m net cash position at the end of 2017) and history of generating consistently high returns on the capital it invests, there can be little doubt that the £3.5bn cap is a quality operation. Right now however, I’d be tempted to shave some profit.

With shares changing hands for 29 times forecast earnings, a lot of positive news and future growth appears priced in. There’s not much in the way of dividends and the departure of co-founder David McMurty as the company’s CEO, despite retaining his role as executive chairman, is an unwelcome if inevitable development.

“Good progress”

With Renishaw’s valuation looking frothy, fellow engineer IMI (LSE: IMI) could be a better option at the current time.

Today’s final results were in line with expectations, despite “mixed market conditions“. In addition to making “good progress” on its strategic initiatives (which included improving operational performance and launching new products), the Birmingham-based business also disclosed further progress in tackling its global pension liabilities. 

While unspectacular, the numbers were still fairly positive. Revenue rose 6% to £1.75bn with adjusted pre-tax profit climbing 8% to £224m. Net debt fell from £283m in 2016 to £265m by the end of last year.  

According to CEO Mark Selway, IMI now expects organic revenues to be higher in the first half of 2018, with a “modest improvement” to margins. The recent acquisition of Bimba —  a manufacturer of pneumatic, hydraulic and electric motion solutions — should also help facilitate the growth of the company’s Precision Engineering division in North America. 

Clearly, this wasn’t enough for the market, with IMI’s stock falling 8% in early trading this morning. Nevertheless, at 16 times expected earnings, I think the company represents better value than Renishaw at the current time. A 3.7% dividend yield for 2018 is also far more attractive than the 1.2% offered by its industry peer.

Is this little-known company the next ‘Monster’ IPO?

Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.

Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.

The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.

But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.

Click here to see how you can get a copy of this report for yourself today

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended IMI and Renishaw. 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.

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 considered, so you should consider taking independent financial advice.

More on Investing Articles

Playful senior couple in aprons dancing and smiling while preparing healthy dinner at home
Investing Articles

Best British dividend stocks for July

We asked our freelance writers to share the top income stocks they’d buy in July, which included Dividend Aristocrats and…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

How I’d apply the Warren Buffett method to buying shares

Learning from billionaire investor Warren Buffett, our writer explains his own approach to investing in shares for his portfolio.

Read more »

pensive bearded business man sitting on chair looking out of the window
Investing Articles

This dividend share yields under 1% — but I’d still buy it

This dividend share has a low yield. So why would our writer consider adding it to his income portfolio?

Read more »

Young lady working from home office during coronavirus pandemic.
Investing Articles

Looking for a good share to buy? Here’s how I do it

Here are two approaches our writer uses when hunting for a good share to buy for his portfolio to aim…

Read more »

man in shirt using computer and smiling while working in the office
Investing Articles

One cheap FTSE 100 share I’d buy for a new bull market

This FTSE 100 share is unloved and starting to look seriously cheap, says Roland Head.

Read more »

Young brown woman delighted with what she sees on her screen
Investing Articles

How I’d invest £500 in UK shares in 2022

Investing a small amount of capital in UK shares can result in high commission costs. Zaven Boyrazian explains how to…

Read more »

Black woman using loudspeaker to be heard
Investing Articles

2 battered FTSE dividend stocks to buy in July!

I'm still searching the FTSE 100 for the best bargains to buy. I think these two big dividend shares are…

Read more »

Woman pulling baffled face
Investing Articles

Can I trust Lloyds’ 6.1% dividend yield?

The Lloyds' share price has sunk in 2022, causing the bank's dividend yield to leap. But can I really trust…

Read more »