Following a very challenging 2015 that saw 70% wiped off its valuation, Glencore (LSE: GLEN) has made a stunning recovery in the last three months. In fact, its shares have risen by 14% during the period as investors have warmed to the wider resources sector. While this doesn’t mean that there will be no further commodity price declines in future months, it does mean that the worst of the commodity crisis may now be over.
Of course, investor sentiment hasn’t warmed towards Glencore exclusively because of an improved outlook for the wider resources sector. The market seems to be upbeat about Glencore’s new strategy, which is seeing it make asset disposals, cut costs and reduce the amount of leverage on its balance sheet. These changes should ensure that Glencore has a brighter long-term future and while its short-term progress could be hampered by weakness in its operating conditions, it appears to have a sound long-term growth outlook. As a result of this, it seems to be a worthwhile buy, although above-average volatility appears to be a given over the coming months.
Price too high?
Also posting an impressive share price rise in the last three months has been Diploma (LSE: DPLM). The technical product supplier’s valuation has risen by 16% during the period and while it remains a high quality business with an upbeat outlook, its valuation may now have become rather too rich to merit purchase.
For example, Diploma trades on a price-to-earnings (P/E) ratio of 19 and while it has an excellent track record of growth, its forecasts for the next two years are somewhat modest. In fact, Diploma’s bottom line is expected to rise by 6% this year and by a further 8% next year, which is roughly in line with the growth rate of the wider market.
And looking back at its growth rate from the last three years, Diploma has only been able to average earnings growth of 5% per annum. This means that while it may offer a degree of resilience in the face of heightened uncertainty in the wider market, Diploma’s shares could underperform over the medium term.
Meanwhile, it’s a similar story with Berendsen (LSE: BRSN). The textile services business has a good track record of earnings growth, with it having increased its bottom line in four of the last five years. However, it trades on a rather rich P/E ratio that indicates that now may be an opportune moment to sell, rather than buy.
For example, Berendsen has a P/E ratio of 18.4 and with its bottom line forecast to rise by 8% this year and by a further 7% next year, its share price could come under a degree of pressure since this is in line with the wider market growth rate. And with Berendsen yielding just 2.8%, it appears to lack income as well value and growth appeal. That’s especially the case while the wider index offers a number of cheap stocks with growing bottom lines, which means that Berendsen may be a stock to avoid right now.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended Berendsen. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.