The FTSE 100 fell 3% last year and is down another couple of percentage-points in the first few trading days of 2015.
Is there still value in these high-fliers, or is it time for investors to take some profits?
International Consolidated Airlines
In five years of penning articles for the Motley Fool, I can’t recall ever writing about International Consolidated Airlines; or either of the two companies — British Airways and Iberia — that merged to form the group in 2011.
The reason is simple. I’m interested in investing in high-margin businesses with what legendary investor Warren Buffett calls defensible ‘moats’, rather than in companies in cut-throat industries with wafer-thin margins — such as the airline sector.
International Consolidated Airlines has benefited from falling oil prices over the last six months, and the shares have risen some 40% over the same period to a record high of 494p (and a quality-business P/E of 16.5). I can say only two things: first, low oil prices won’t last forever, and, second, singing the praises of the company today is to arrive at the party somewhat late.
Momentum traders my see further upside in the shares, but International Consolidated Airlines isn’t my idea of a long-term investment.
At the start of December, I tipped Hikma Pharmaceuticals to be promoted to the FTSE 100 during 2015. The shares have continued to rise, and have hit a new all-time high of 2,152p, as I write, putting this fast-growing Middle East-based company on a forward P/E of 25.
Unlike International Consolidated Airlines, Hikma is a high-margin company — the operating margin is running at 33% — and it’s stock I’ve held myself in the past. While I sold out for a nice profit on the basis that the valuation was starting to look stretched, the shares have since gone on to double again! Given that chastening experience, I’m wary about suggesting Hikma is an outright ‘sell’, but, if I were still a shareholder, I think I’d be happy to take some profit at current levels to invest in more attractively-rated, out-of-favour opportunities.
Domino’s Pizza Group
Back in the day, when I was a student, a bag of chips for a few pennies was an occasional treat — chips with curry sauce, if I was feeling particularly profligate. These days, in the university town in which I now live, I marvel at the queues of students outside the Domino’s Pizza takeaway shop and the fleets of mopeds heading for the university; heck, the last time I looked, there were even Domino’s-branded pick-up points dotted around the campus.
But it’s not just students for whom the takeaway has become less of a treat and more of a staple. We’ve all succumbed. And Domino’s, and its shareholders, are reaping the rewards of a cultural shift. The shares of this fast-food franchise success-story have risen relentlessly since the company listed on the stock market in 1999, and it was no surprise to see an all-time high of 702.5p hit on New Year’s Eve.
Domino’s trades on a jalapeno-hot P/E of over 20, but with mid-teens forecast earnings growth and a mid-to-high-teens operating margin, I rate the stock a long-term hold.
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G A Chester has no position in any shares mentioned. The Motley Fool UK has recommended Domino's Pizza. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.