Thanks mostly to the farce that is Brexit, there’s lots of chatter about the UK being a cheap place to invest at the moment. With the market trading on a relatively low CAPE ratio of 16, there’s certainly some substance to that.
That’s not to say, however, that every stock out there is in bargain territory. Indeed, with a valuation of 44 times forecast earnings prior to the bell this morning, platform provider Hargreaves Lansdown (LSE: HL) is anything but inexpensive.
Based on today’s albeit-fairly-positive trading update, I’d probably hold off from buying the stock right now.
Positioned for growth
Thanks in part to welcoming 53,000 new clients, the company recorded net new business of £2.9bn over the four months to the end of April, bringing the total to £5.4bn in the year to date (10 months to April 30).
Both of the above are lower than over the same period in 2018 (£3.3bn and £6.6bn, respectively), but it’s worth remembering markets were pretty volatile towards the end of last year with investors pulling money out of equities at a rapid rate.
Fortunately for Hargreaves, the return of positive sentiment in 2019 so far has allowed it to report holding a record £97.8bn of assets under administration by the end of the period. This has, in turn, helped the business achieve net revenue of £159.5m in the four months, ahead of the £150.6m achieved in 2018.
Shares in Hargreaves are down 1% right now, suggesting this news was already priced in.
Taking into account its extraordinarily large returns on capital and operating margins, this is a quality business and one that should go from strength to strength.
As CEO Chris Hill remarked today, the ongoing need for its services from investors and savers should mean the company is “well positioned to deliver attractive growth,” despite the rather precarious political and economic state of affairs we’re in.
Nevertheless, it’s worth remembering that no stock is worth buying at any price. As such, the £11bn-cap remains on my watchlist as one to capture on any general weakness in the market.
Also releasing a statement on trading today was thermal energy management expert Spirax Sarco Engineering (LSE: SPX). Again, this update was more than respectable.
Organic sales growth since the beginning of 2019 has remained stable despite weakening global Industrial Production growth forecasts (2% compared to 2018’s 3.1%). Encouragingly, operating profit was also ahead of the same four-month period last year.
Broken down, geographically-diversified Spirax reported strong growth in the Asia Pacific region, although some of this was the result of “large one-off projects.”
Elsewhere, the company saw a “modest benefit” of customers cautiously stockpiling as the UK approached its original EU exit deadline at the end of March.
Importantly for those already invested, guidance on growth and margins for the full year were left unchanged, although this does rest on the assumptions that trading doesn’t get worse and exchange rates don’t move all that much.
Like Hargreaves, Spirax is another of the FTSE 100’s (justifiably) dearer stocks based on traditional ‘quality’ metrics. That said, its share currently trade on 32 times forward earnings. For a company whose “short order book provides only limited visibility,” that’s undeniably pricey.
Considering its average P/E from the last five years has been just under 25, this will also stay on my watchlist for now.