Looking back at your own stock tips is always an interesting exercise, or should the word be scary? I highlighted these two from the FTSE 250 back in January. How have they done?
Bovis Homes Group
At the start of the year, I noted that many housebuilders were trading at rock bottom valuations while offering outsized yields. One was Bovis Homes Group (LSE: BVS), which was just starting to recover as sector sentiment picked up.
I wrote at the time that this was due to the “general feeling that the likelihood of a cliff-edge, no-deal Brexit is beginning to fade”. I was a bit presumptuous there, the Brexit cliff edge looked perilously close in October, before Boris Johnson surprised everyone by striking his revised deal with the EU.
What happens to the Bovis share price now very much depends on next week’s general election result. The housebuilding sector is particularly exposed to Brexit uncertainty, as we saw when it collapsed in June 2016.
It would be nice to sort out Brexit one way or another, so we focus on the fundamentals of companies like Bovis, because they look pretty solid, with low interest rates and the property shortage driving demand. September’s interims saw profits before tax up 20% to a record £72.4m, net cash climbed to £102.4m and the interim dividend rose 8% to 20.5p a share.
The forward yield is now a thumping 8.7%, and management is progressive, as we saw in September. The valuation still looks tempting at 11.1 times earnings. City analysts expect earnings to rise 8% next year, and another 9% in 2021.
The Bovis share price is up 22% since I tipped it, so I’ll call that a win (in the interests of honesty, housebuilder Persimmon, which I tipped in the same article, rose a less impressive 6.5%). If we manage to sort out Brexit, things could improve further. Or did I say that in January?
Dechra Pharmaceuticals
At the start of the year, international veterinary pharmaceutical operator Dechra Pharmaceuticals (LSE: DPH) was recovering from a setback, triggered by a management warning that a major US supplier was targeting its patch in the UK and mainland Europe.
The threat of increased competition hammered the share price, even as the £2.82bn company posted 21% earnings growth. I nonetheless backed Dechra to succeed, highlighting its regular double-digit earnings growth and progressive dividend policy, although I expressed concern at its high forecast valuation of 26.3 times earnings.
It is more even more expensive today, trading at 31.5 times forecast earnings. The main reason for that is a lickety-split performance, with the Dechra share price up 18% since I tipped it.
September’s preliminaries were promising, with revenue up 17.5% to £481.8m, underlying operating profit rising 27.3% to £127.4m, and a whacking 23.9% increase in the full-year dividend to 31.6p (although it still only yields 1.2%).
After three years of double-digit earnings growth (51%, 19%, 17%) Dechra seems to be heading for a slowdown, but next year’s forecast of 8% is hardly disastrous. I’m pleased I tipped it in January (I tipped Hikma Pharmaceuticals in the same article, which did even better, growing 21%). But given today’s lofty valuation, Dechra looks more like a hold than a buy today.
