Why I’d take profits on this stock after returning 350% in 5 years

A business that provides photobooths in shopping centres, supermarkets and airports may seem a bit of a dinosaur in this world of smartphones, but Photo-Me International (LSE: PHTM) has navigated this new world with aplomb. Indeed, in the past five years shares of the company are up over 350% as management has doubled operating profits and managed to steadily increase revenue.

Yet after this greatly successful run I reckon now may be time for shareholders to begin taking some profit. The main issue for me is that as management has sought out growth, it has been forced to diversify quite far away from its core photo kiosk business into the likes of operating self-serve launderettes across Europe.

This has kept sales growth marginally positive, 3.3% in constant currency terms over the past year, even as the core photo business has turned into a slowly declining cash cow. But, it also means that investors are being asked to trust management to easily switch focus to rapidly expanding the estate of launderettes and the world of investing is filled with examples of companies struggling to successfully diversify into dramatically different industries.

That said, thus far the expansion into launderettes is going well. The group added 1,000 units in the past year and is a little over half way towards its 2020 goal of having 6,000 in operation across the world. And with a net cash position of £39.2m the company does have a buffer to fall back on.

But with its shares pricey at 18.5 times forward earnings in the midst of a dramatic shift in strategy, I’d be wary if I were a shareholder. Given management’s track record of success I wouldn’t sell my entire holding but locking in some of my gains would be too appealing to pass up at this point.

A sturdier business

Another surprising winner of the past few years is lumber merchant James Latham (LSE: LTHM). Shares of the firm are up nearly 200% over the past five years as the company has invested in growth and taken advantage of rising demand for its goods from homebuilders.

In the year to March, revenue rose 6.9% to £198.8m and operating profits rose by £1m to £13.2m. Like Photo-Me, the company’s management team also takes a conservative approach to its balance sheet. It had a net cash position of £17.2m at year-end and maintained dividend cover at 3.6 times.

However, before would-be investors take the plunge, there are a few things to remember about the timber business. For one, it’s a commodity, which means relatively low margins for suppliers, a shallow moat to entry and few competitive advantages. Of course, demand for timber is also tightly correlated to the health of the domestic building trade so sales and earnings can be highly cyclical.

James Latham is a well-run business with a long history of success. But with a low 1.8% dividend yield, its shares pricey for a commodity supplier at 14.8 times earnings, and the domestic housing market looking to be at or close to peaking, I’d wait for a downturn before beginning a position.

If it’s a less cyclical growth share you’re after, I recommend checking out the Motley Fool’s Top Growth Share of 2017, which has increased sales every year since 1997. And the Fool’s Head of Investing reckons its share price could triple in the coming decade as the company takes its first steps abroad.

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Ian Pierce has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.