There’s a school of thought that suggests you should cut your losses and let your winners run. I don’t hold with that myself, as I don’t see how a past share price trajectory has anything to do with the valuation of a share today, but it is true that some winners just keep on winning.
Ocado (LSE: OCDO) shares finally came good in 2018, and though they’ve actually fallen back from their summer peak, they’re still up 96% year-to-date.
The first big boost came in May, when the online supermarket announced a deal under which Ocado’s technology will be used by Kroger of the USA for its food distribution operations. The excitement was understandable, as Kroger is big — it recorded sales of $122bn in 2017.
So overnight, Ocado went from just a new kind of supermarket to a technology provider, the shares went through a resulting re-rating and spiked upwards. But is that jam tomorrow I’m hearing? And echoes of the tech stock boom?
Right now there’s no profit on the horizon for the next couple of years, and no matter how good a company’s technology, valuation matters to me. My verdict: too expensive for the risk.
Precious dirt
Compared to Ocado’s leap, the 37% gain for Evraz (LSE: EVR) looks almost pedestrian — though it is up almost 120% over the past two years as the commodities sector comeback has strengthened, and over five years Evraz has produced a four-bagger.
The company produces steel and coal, and as the mining cycle eases, prices have been strengthening and sales have been rising — and the company has moved back into profit after several years of losses. But even after such a strong share price run, Evraz shares are still only trading on forward P/E multiples of around five to six — and there’s a big return to dividends forecast.
On fundamental valuation, Evraz shares perhaps look like a steal, but I have a couple of reservations. For one, the company operates at high levels of debt. Although down a little, net debt stood at $3.9bn at the interim stage, and though that’s in line with EBITDA and not stretching on that measure, it could gear things unfavourably in any new cyclical downturn.
And the cyclical nature of the sector also makes me cautious. My verdict: fairly valued right now.
Turnaround
Educational distributor Pearson (LSE: PSON) has undergone something of a transformation over the past year, and though its 2017 dividend had to be slashed to cut costs as the firm struggled with growing online competition, a return to above-inflation rises appears to be on the cards. Yields for this year and next are only likely to be a little above 2%, but I see steady progress in the years to come.
Net debt is tumbling and stood at £775m at the halfway stage, down from £1.6bn a year previously. Disposals played a big part in that, but the firm’s operating cash flow is strengthening too.
Analysts have an 11% rise in earnings per share noted for this year, though they’re a little more cautious over 2019’s expectations and they’re a little bearish overall.
But I think I’m seeing a return for Pearson to a new phase of steady earnings and dividends. My verdict: good value for 2019.
