Investing in high-flying growth stocks can be a risky business if the company fails to live up to expectations. If it promises the world but fails to deliver, the market tends to punish the shares severely, leaving those shareholders who didn’t get out fast enough holding the bag.
A bag to take away?
Just Eat (LSE: JE) is promising the world to its shareholders and so far, has managed to deliver. For the year ending 31 December 2016 City analysts are expecting it to report a pre-tax profit of £93.2m and earnings per share of 11.2p, up 69% year-on-year and up 700% since 2013. So far so good but can it keep this explosive growth rate going?
City analysts don’t believe it can. Earnings growth is expected to fall to 46% year-on-year for 2017 and 37% for 2018, lower but still impressive. These forecasts are based on the fact that since Just Eat began to dominate the takeaway market, a whole host of new competitors have emerged. As a result, analysts believe sooner or later Just Eat’s growth is bound to slow.
Still, despite growing headwinds shares in the firm currently trade at a forward P/E of 31.7 for 2017, which actually looks cheap compared to its forecast 46% earnings growth. If the company hits this target then the shares could head higher, if not then shareholders should prepare for the worst.
A bag of clothes
As the post-Christmas trading updates from retailers across the UK have shown over the past few weeks, the UK retail sector is under enormous strain right now. And it’s expected that the pain for the retailers will only get worse over the next year as firms have to deal with the triple whammy of higher operating costs, higher inflation and a subdued consumer.
JD Sports Fashion (LSE: JD) won’t be exempt from these pressures. However, despite the headwinds facing the sector, shares in the company continue to trade at a high valuation of 19.9 times forward earnings. City analysts expect the company to report earnings per share growth of 46% for the year ending 31 January 2017, falling to 14% for the year after and 8% for the year to January 2019.
Even after all of this growth, based on current estimates, shares in JD are trading at a 2019 P/E of 16.1, which seems overpriced considering the sector’s problems. It might be best to avoid JD for the time being.
Growth at Zoopla Property (LSE: ZPLA) has exploded over the past few years thanks to the UK’s booming property market. And the site is a must-see for many thanks to the trend for ‘property porn’. This phenomenon has seen visitors flock to sites like Zoopla just to look at houses with no intention to buy.
But lots of people are buying. Over the past three years, Zoopla’s earnings per share have doubled, and analysts are expecting further growth of 11% and 15% respectively for the next two years.
Even after considering the above growth rates, shares in Zoopla look expensive. They’re currently trading at a forward P/E of 24.3, more than double the projected growth rate. If management can’t produce the figures investors are expecting, then Zoopla’s shares could be on track for a sudden re-rating lower.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended Just Eat. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.