I’m looking to add a growth stock to my self-invested personal pension (SIPP). This marks a change in strategy for me.
In recent years, I’ve focused on value shares, especially income-paying FTSE 100 financials like Legal & General Group. But I need a break from being a contrarian. Today, I want to piggyback on some momentum. Pick a red-hot growth share and, with luck, hope it climbs even higher.
Naturally, both strategies carry risks. Value stocks can turn out to be traps, while high-flying growth shares can come crashing down. I’m especially wary of buying after a stock has already surged, which is exactly the case with a FTSE 250 company that’s rocketed 20% in the last week.
This isn’t a flash in the pan though. Its shares are up more than 50% over 12 months and over 115% in five years.
Defence demand is surging
The stock in question is Chemring Group (LSE: CHG), and it has the benefit of operating in a sector that’s very much in demand right now: defence.
Chemring is a world leader in chemical and biological threat detection, electronic warfare and systems that locate improvised explosive devices. In today’s uncertain world, its kit is in demand.
It isn’t the only one riding this trend. FTSE 100 peer Babcock International jumped 13% last week. BAE Systems and Rolls-Royce have also wowed lately. Happily, I hold both.
Chemring got a major lift on Friday (6 June) when analysts at Berenberg upgraded the stock from Hold to Buy, citing a “very bright” outlook to 2030. It pointed to a pipeline of opportunities in Chemring’s energetics division.
Big order book
Berenberg noted that earnings per share are forecast to compound at 19% a year on average over the next three years. The broker called Chemring’s price/earnings-to-growth (PEG) ratio “undemanding”, and hiked its price target from 470p to 670p.
This came hot on the heels of a first-half update on Tuesday, when Chemring confirmed its annual guidance after reporting a 12% rise in underlying earnings to £39.8m. The order book hit a record £1.3bn, with intake up 42% to £488m.
Management noted rising global tensions, from Ukraine and the Middle East to the Asia-Pacific, with many governments increasing their defence budgets and rushing to replenish depleted stockpiles.
Timing matters
All this explains the recent rally, but even strong shares can run too far, too fast. There are five analyst forecasts for the stock, all with a 12-month target of 540p. That’s almost 7% below today’s price of 584p. However, all six analysts rating the stock currently label it a Strong Buy. None say Hold, none say Sell.
After quickfire surge, Chemring may slip back slightly as profit takers emerge, so I’d wait and watch before diving in. At a price-to-earnings ratio of 36, it’s hardly cheap. Personally, I already have plenty of exposure to defence through BAE and Rolls-Royce.
If I wasn’t already so heavily exposed to this dynamite sector, I’d seriously consider buying Chemring in the days ahead. There’s still a chance I might, if the heat goes out of it a little.
