The Motley Fool

Is a sharp 13% crash in this FTSE 100 stock a buying opportunity for me?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

One English pound placed on a graph to represent an economic down turn
Image source: Getty Images

The past few weeks have been a good one for the FTSE 100 index as it made steady gains. But not all its constituents have rallied. One stock in particular caught my attention yesterday after it dropped over 6%. 

But that is just one in a series of drops that meteorology and healthcare stock Renishaw (LSE: RSW) has seen in the past two weeks. Since the last week of April, in total it has seen a 13% drop, however, in a year it’s risen from 3,776p to 5,645p as I write.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic… and with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. And if you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio.

Click here to claim your free copy now!

Why is the Renishaw share price crashing?

This drop follows complications regarding the company’s potential sell-off. It had put itself up for sale and mid-April was the deadline for potential buyers to express their interest. However, the response to the otherwise financially healthy company has been lukewarm. 

According to a Bloomberg report, the company’s high valuations are responsible for this. According to the Financial Times the company’s 12-months trailing price-to-earnings (P/E) ratio is at a high 97 times. Its forward earnings ratio is also slated at 51 times.

To me, this suggests that Renishaw’s sale may or may not go through. If it does not, would I consider buying the share or not based on its merits?

How has it performed?

In terms of financials, it is in a strong place. In its trading statement for the nine months ending March 31, the company reported 4% increase in revenue. Much of Renishaw’s revenues are derived from meteorology, which provides products like probe systems and performance testing products, among others. 

Its healthcare segment is growing fast too, with an 18% increase from last year. The segment includes dental products and precision engineering solutions for treatment of central nervous system diseases. 

Renishaw’s profits also came in very strong, with an increase in statutory pre-tax profits of 440% to £106mn for the year to date. 

The combination of investors’ heightened interest in relatively safe stocks over much of the past year, and its own performance reflects in its share price too. Even after the latest decline, it is presently trading near all-time highs. On the other hand, the share price has still more than doubled since the plunge seen during last year’s stock market crash. 

I like Renishaw stock, going by the fact that it is a highly specialised company and is performing well. 

What can happen next

At the same time, for me buying shares in a company that is up for sale is a gamble. This is especially so for Renishaw at present, where valuations are a concern. If I buy the stock at today’s price, and it decides to sell itself at a lower valuation, that leaves me with a loss. 

On the other hand, if the sale does not go through, and its share price keeps rising, I miss out on a great buying opportunity. 

What I’d do about the FTSE 100 stock now

Right now, I think that the risk in buying it is higher than the potential return, especially at its elevated share price. So I will now watch this FTSE 100 stock for developments and buy it only if they look favourable. 

FREE REPORT: Why this £5 stock could be set to surge

Are you on the lookout for UK growth stocks?

If so, get this FREE no-strings report now.

While it’s available: you'll discover what we think is a top growth stock for the decade ahead.

And the performance of this company really is stunning.

In 2019, it returned £150million to shareholders through buybacks and dividends.

We believe its financial position is about as solid as anything we’ve seen.

  • Since 2016, annual revenues increased 31%
  • In March 2020, one of its senior directors LOADED UP on 25,000 shares – a position worth £90,259
  • Operating cash flow is up 47%. (Even its operating margins are rising every year!)

Quite simply, we believe it’s a fantastic Foolish growth pick.

What’s more, it deserves your attention today.

So please don’t wait another moment.

Get the full details on this £5 stock now – while your report is free.

Manika Premsingh 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.