In August, the top-performing FTSE 250 stock was Just Group (LSE:JST). After rallying 21%, it’s now up 95% over the past year. For a company with a market cap of £1.48bn, this is quite an impressive feat! Yet despite the jump, I think that there’s further room to move higher. Here’s why.
Results help to spark a move
To begin with, let’s run through why it jumped so much last month. One of the big influences was the H1 results, which came out in the middle of the month. When the title of the report is “consistently outperforming our targets”, you know that it’s going to be a good read.
Sales grew by 30%, filtering down to help operating profit jump by 44% versus the same period last year. The defined benefit pension side of the business is really motoring. Interestingly, the report noted that “over the past 18 months we have written over one third…of all defined benefit transactions in the market, more than any other provider.” That’s a very powerful comment and shows the position that it has grown to have in this space.
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The outlook going forward is something that helped to push the stock even higher. The firm expects to exceed the previous guidance for full-year operating profit. It doesn’t stop there, with Just Group expecting that the underlying drivers of growth should remain intact for the foreseeable future.
Why it could keep going
Even with the jump in August (and for much of the past year), the price-to-earnings ratio isn’t high. It currently sits at 5.11. For reference, I use 10 as a ratio for a fairly valued company, so a ratio of 5 makes me think the stock is undervalued.
Given the trajectory of earnings, I only expect the earnings per share part of the ratio to grow over the next couple of years. If the share price doesn’t increase, this would make the ratio fall further. Logically, I’d expect the share price to rally, at least to keep the ratio at 5. If anything, I’d expect the pace of the share price jump to be larger than that of earnings, in order to push the ratio closer to 10.
In my eyes, this means that I still have time to buy and that I haven’t missed the boat.
Points to remember
Before I rush to buy the stock, I do need to accept potential risks. One is regulatory change. In my view, the insurance industry is one of (if not the most) tightly regulated areas in the UK. This means that any changes can have big implications for the future operations of Just Group.
Another factor I need to be aware of is the impact of interest rates. A lot of the investment portfolio for the pensions is based around bonds. When interest rates fall, bond prices go up, but the yields go down. This can make it harder for the company to achieve a high rate of interest on these investments.
Even with these concerns, I think the company is in a great place right now. I’m thinking about adding it to my portfolio for the long term.
