Calling a top for a particularly share is no easy task. The momentum effect in stocks means shares that have a strong past performance usually also continue to do well in the near future. But, at some point, shares usually pull back after a strong run in its share price.
Lloyds Banking Group
Shares in Lloyds Banking Group (LSE: LLOY) have risen 168% over the past three years. But ever since shares in Lloyds reached 89 pence back in May 2015, its share price has struggled to make further gains. As of today, its share price has fallen back to 82.1 pence.
Its latest quarterly results disappointed investors, as provisions for the mis-selling of paypment protection insurance and various conduct issues continued to mount. In the first half of 2015, the bank set aside another £1.4 billion. There remains uncertainty surrounding further litigation and conduct issues, but it appears the worst should be over.
Strong fundamentals, particularly with underlying growth in profitability and robust cash generation, should mean Lloyds shares have much further to climb. Underlying profits grew by 15% to £4.38 billion; whilst statutory pre-tax profits increased 38% to £1.19 billion. With its common equity tier 1 ratio rising to 13.3%, well above its statutory minimum of 11%, Lloyds is in a very strong position to boost shareholder returns.
Analysts expect Lloyds will eventually increase its dividend payout ratio to 50% of net income. Currently, analysts expect dividends will total 2.7 pence in 2015 and 4.1 pence in 2016, which implies a forward dividend yield of 3.2% and 4.9%. With such tremendous dividend growth, shares in Lloyds do not appear to have reached their top.
Shares in Taylor Wimpey (LSE: TW) have risen 318% over the past three years, as housebuilding margins have expanded substantially and construction activity continues to pick up. Unlike share in Lloyds, momentum in Taylor Wimpey’s share price does not seem to be slowing. Nor should it. The housebuilder continues to deliver double-digit earnings growth, and analysts are just as optimistic about the future.
Analysts currently expect underlying EPS will increase 32% this year, to 14.8 pence. This implies its shares trade with a forward P/E of 13.1. Underlying EPS is also predicted to grow another 15% in 2016, which lowers its 2016 forward P/E to 11.5. On top of this, it has a prospective 2015 dividend yield of 4.8%.
Ted Baker (LSE: TED) is not showing signs of slowing down. Underlying EPS grew 21% in 2014/5, as the fashion group continues its international expansion drive. Analysts are also optimistic about future earnings growth, with expectations that underlying EPS will grow further by 21% in 2016/7 and 16% in 2016/7.
Unfortunately, its forward earnings multiples are becoming quite stretched. Its forward P/E is 32.5 on 2015/6 earnings, and it would only fall to 27.9 on 2016/7 earnings. With such expensive valuations, any setback in earnings growth could send its earnings multiple to tumble back down to the mid-teens. And that would be a long way to fall from today’s levels.
Shares in Greggs (LSE: GRG) are also pricey. Its forward P/E is 25.6 and the shares yield just 1.7%. So far, though, things are looking up. An improving economy is lifting household disposable incomes, and its customers are spending more money at its store. An expanded product range, including new healthier choices and higher margin products, helped lift first half profits 52% to £25.6 million. But increasing competition from its rivals and changing consumer tastes should mean Greggs’ earnings growth is likely to slow in the longer term. Although it may be too early to call a top, shares in Greggs are unlikely to have too much upside.
More investment ideas?
If you are looking for reliable income-generating opportunities, The Motley Fool has a free special report that lists alternatives more aligned with your investing strategy: "The Fool's Five Shares To Retire On". These five large-cap shares have been selected for their income and growth prospects. The 5 companies generate stable cash flows; as they benefit from their dominant market positions and broad global exposure.
Jack Tang owns shares in Taylor Wimpey. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.