One way that I can identify good stocks to buy is to eye up those that have momentum. For example, I can consider the best-performing stocks from this calendar year. At the top of the pile in the FTSE 100 is Ashtead Group (LSE:AHT). With an impressive one-year gain of 74%, momentum is clearly strong here. Should I buy now for further potential gains in 2022?
No frills, but strong results
Firstly, let’s consider the background. Ashtead is an international equipment rental company. It operates in the UK, but also has key markets in the US and Canada. The company focuses on providing good availability, reliability and ease as its three business mission values.
Although this might not sound like the most interesting business to be involved with, I can’t fault the numbers (which helped to make it the best-performing stock). In the latest half-year results, double-digit percentage growth was seen in all key areas.
Revenue climbed 18% versus the same period last year, with operating profit up 34%. This helped to deliver a profit before tax of $979m, up from the 2020 figure of $678m, a 42% increase.
The interim dividend per share was increased by 28%, however the dividend yield only sits at 0.75%. One of the downsides of it being the best-performing stock is that the higher share price decreases the dividend yield. This might deter income investors from buying the shares, but would it deter me?
A top-performing stock for 2022?
It’s one thing to note past performance, but I want to assess if the share price gains could continue next year. After all, the move higher means that the price-to-earnings ratio has been pushed up. It’s currently 38.6, well above the FTSE 100 average. Personally, anything above 20 makes me a little sceptical.
Another potential risk going forward is the source of UK revenue. In the H1 results, 32% of revenue came from the Department of Health for pandemic-related assistance. I imagine that this business will reduce as fewer testing sites need rental equipment. This will negatively impact the UK revenue base.
On the other hand, there are reasons to support Ashtead being a top-performing stock again next year. For example, the business is investing heavily in existing and new projects. In the latest update, the investment figure was $1.2bn. This should help to pay dividends in the future as the funds are put to use.
Further, the business has healthy profit margins. In the US, the EBITDA margin was a shade over 50%. This is high, and means that Ashtead is able to turn a good proportion of revenue into profit. This will help to ease any pressures if margins are squeezed for any reason next year.
Weighing everything up
Overall, Ashtead has quietly gone about becoming the best-performing FTSE 100 stock this year. But I struggle to expect the same kind of gains in 2022 due to higher valuations and potentially lower UK revenue. Although I don’t expect the share price to fall, I won’t be investing as I think I can find better options elsewhere.
