Is this quality FTSE 250 growth stock a knife worth catching after today’s big fall?

This former market darling has fallen heavily today but this Fool isn’t ready to buy just yet.

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With the Brexit ‘will they, won’t they?’ circus rumbling on and global growth looking shaky, it’s fair to say investors remain jittery on the outlook for stocks, leading to the share prices of some high-quality outfits being hit hard. Today, I’m looking at two examples from the FTSE 250, both of whom reported to the market this morning. 

Still too dear?

When it comes to identifying great businesses, high-precision metrology and healthcare technology firm Renishaw (LSE: RSW) has regularly ticked a lot of the necessary boxes: high returns on capital employed, fat operating margins, a global leader in what it does with an experienced management.

Despite this, the company’s share price has certainly struggled of late, falling almost 40% in value from the highs hit back in January 2018 by the end of trading yesterday. 

Today’s trading update for the three months to the end of September hasn’t helped matters. Indeed, the stock was down another 12% as markets opened. So what’s going on?  

Put simply, Renishaw is continuing to feel the effects of reduced demand for its equipment. Revenue over the period was £124.6m — 19% lower than the £154m achieved over the same quarter in 2018. While last year’s number was helped by a few large orders from manufacturers in the Asia-Pacific region, this is still a significant drop. Pre-tax profit also fell a shocking 85%, from £33.5m over Q1 2018 to just £5.1m this time around.  

To make matters worse, there’s little sign of this malaise ending soon with the company reiterating its view that trading would “remain challenging” for the rest of the current financial year due to the uncertain economic conditions. All perfectly reasonable, of course, but not what its investors want to hear.

Renishaw’s stock was trading on almost 26 times forecast earnings before this morning. That’s punchy, even for such a quality outfit that still has net cash on its balance sheet (£98.5m), in addition to all its other attributes.

While a resolution to Brexit could see a brief recovery in many second-tier stocks, I’m not inclined to get involved just yet given this is still higher than its five-year average P/E of 23. One to come back to in 2020, I feel. 

Far more upbeat

Despite bearing similar hallmarks of quality (e.g. consistently high ROCE), shares in recruitment specialist Hays (LSE: HAS) — like those of Renishaw — have been under pressure for a while now. Go back a little over a year and the business was valued 46% more than it was at the close of play yesterday. By contrast to its index peer, however, today’s Q1 update was far more positive.

While group net fees fell by roughly 1% over the period — again blamed on “difficult economic conditions and tough growth comparatives” — 10 countries grew quarterly fees by over 10% and eight “still delivered all-time records“. Far from being gloomy on its outlook, CEO Alistair Cox also said he was confident the company’s strong market positions and finances (£90m in net cash) would allow the company to negotiate these tricky times while also investing for the future. Cue a 6% jump in the share price.

Shares were trading on 13 times forecast earnings earlier today — not unreasonable compared to its peer group and less than its average five-year P/E of 16. The 4.2% dividend yield might also be adequate compensation for some while they await a recovery.

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.

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

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