Momentum stocks are always tempting, but the worry is that they crash the moment you hop on board. So will these three FTSE 100 flyers plunge back to earth?
Global mining and oil giant BHP Billiton (LSE: BLT) roared back to form in 2016 along with the rest of the commodity sector, and now trades 72% higher than a year ago. It was helped by the rebound in energy and commodity prices from the lows of January and February last year, another Chinese stimulus booster for copper and iron ore, and finally, the Trumpflation play.
Its share price has faded in recent weeks, along with the oil price rally. The Bloomberg commodity index is down 2.75% year-to-date. Markets still have faith in Trump, despite the many obstacles standing in the way of his stimulus blitz. But that may not last.
The US Federal Reserve sank the dollar and turbo-charged commodity stocks after Janet Yellen suggested we will see three rather than four rate hikes this year. And at a company level, BHP Billiton looks strong, with recent half-year underlying earnings up 65% to $9.9bn, net debt falling $6bn to $20.1bn, and a doubling of the interim dividend.
Forecast earnings per share (EPS) growth of 471% this year should reduce the valuation to a manageable 12 times earnings. The dividend is recovering well, with a forecast yield of 4.6%. BHP Billiton’s momentum will inevitably slow, but it still packs plenty of power.
It has been quite a party for cruise ship operator Carnival (LSE: CCL), whose share price has gone full steam ahead, rising 27% over the past 12 months. The cruise industry has been buoyant in recent years, and Carnival’s passenger numbers have risen strongly, with 2016 passenger income topping $12bn, after dipping to $11.6bn in 2015.
The rising oil price was was a real headwind but now that has gone into reverse, while the stronger dollar has hit overseas income, and I expect that to continue. Rising interest rates could hurt as well. I reckon its valuation of 20.6 times earnings now looks expensive, especially combined with a disappointing 2% yield. Other stocks are currently doing a lot more to float my boat.
Multinational product testing, and certification company Intertek Group (LSE: ITRK) is also trading at a pricey valuation, in this case 23 times earnings, after a rip-roaring year. The share price is up 26% over the past 12 months and has spiked in recent weeks after the company reported an 18.5% rise in full-year 2016 sales to £2.57bn, as weaker sterling boosted overseas earnings.
Intertek’s acquisitions policy continues, adding £242m to annual revenues, while the full-year dividend was hiked 19.3% to 62.4p. Rapid recent growth has reduced the yield to 1.6% but management has committed to a generous dividend payout ratio of around 40% of earnings. Again, I suspect the pace of growth is likely to slow, especially if the pound recovers, so it might be better to play for a cheap entry point. But this is a strong, well-managed business that all too easy to overlook. Keep it on your watchlist.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Intertek. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.