Just Eat (LSE: JE) shares plunged 10% on Wednesday to 762p, before pulling a little back to 785p as I write, as the fast food delivery pioneer was hit by ambitious expansion plans from Deliveroo.
The privately-owned competitor has announced plans to add around 5,000 extra UK sellers to its service. Its new ‘Marketplace+’ feature reaches out to sellers who wish to use Deliveroo’s own delivery network, while still running their own deliveries too — allowing a flexible mix of both channels.
That collides head-on with Just Eat’s maturing service, which also uses a mix of its own drivers plus restaurants’ own systems, and it could be a game changer.
For me, this highlights a few key things about investing in growth stocks, the main one being to keep re-assessing your original decisions in the light of new developments.
When the news changes…
I was bullish about Just Eat when I last looked back in November, mainly because of the company’s early mover advantage and the list of impressive names on its roster — Just Eat had recently signed up KFC. I’d seen it as providing significant barriers to entry, and the shares went on to top 900p.
But this latest news has made me re-examine my view, on several counts. Deliveroo’s new tool opens the market up to thousands of extra outlets with its flexibility. And there isn’t really any long-term commitment needed from food sellers to these delivery systems.
Just Eat’s forward P/E of over 40 was risky but I’d thought it a risk worth taking. I’ve changed my mind, and knowing when to sell your mistakes is a key part of growth investing. If I’d bought at 790p at the time, I’d be selling now for a loss of 5p.
An overlooked growth stock?
I recently looked at how running a growth screen over the FTSE’s shares can help us find candidates, and one that satisfied my criteria was auto lender S&U (LSE: SUS). I was looking at companies with low PEG ratios (which relate the P/E to growth forecasts from analysts), while keeping clear of any with worrying debt.
S&U passed the test with PEG multiples of just 0.6 for this year and next, as the City has earnings growth forecasts of 19% and 16% pencilled in for the two years. And that comes after a similar 19% rise for the year to January 2018 — a period which brought in the 18th year in a row of profit rises.
Chairman Anthony Coombs told us that “the markets in which we operate remain strong,” pointing to the Finance and Leasing Association’s data showing that “used car sales increased by 6% in number and 12% in value in 2017.“
But S&U isn’t attractive for its growth characteristics alone — it also pays handsome dividends. The 105p per share paid for the year just ended provided a yield of 4.6%, was almost twice covered by earnings, and represented an inflation-crushing rise of 15% over the previous year. In fact, between 2014 and 2018, S&U’s dividend has almost doubled from 54p. Forecasts suggest similar rises this year and next.
There’s surely some risk should interest rates eventually rise and the current lending boom start to cool. But with a 2020 forward P/E of under 10, I think that’s already in the share price.
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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Just Eat and S & U. 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.