While the FTSE 100 has experienced a strong bull run in recent months, the reality is that share prices do not rise in perpetuity. Certainly, the index may make further gains, especially if the pound remains weak, but in some cases there are now stocks which have valuations that are difficult to justify. They could be susceptible to a decline in the medium term. Here are two prime examples of stocks which could be worth selling today ahead of what may be disappointing share price performance.
Reporting on Tuesday was quality assurance specialist Intertek (LSE: ITRK). Its share price gained over 8% following its first-half results. They showed a rise in revenue of 2.7% at constant exchange rates, while organic revenue growth was even lower at 1.7%. However, with the company’s portfolio strength and cost discipline driving margins up by 110 basis points, its earnings rose by 11.4% on a per share basis.
Looking ahead, it is expected to record a rise in its bottom line of 8% in the current year, followed by further growth of 7% next year. The company seems to have growth potential beyond 2018, with it being well-placed to grasp a growth opportunity from the $250bn global quality assurance industry. However, with its shares trading on a price-to-earnings (P/E) ratio of 25.5, this potential seems to have already been priced in.
In the short run, investor sentiment in the stock appears likely to improve further. The company’s stock price has been buoyed by its update, and an even higher valuation could be possible in the near term. However, in the long run there appear to be better risk/reward opportunities within the FTSE 100. This means it may be the right time to sell Intertek.
This year has been a positive one for commercial pest control company Rentokil (LSE: RTO). Its shares have increased in value by 30%, with it outperforming the FTSE 100 by 26% since the start of the year. However, this means that it now has a P/E ratio of 24. Even though Rentokil is expected to report an annualised rise in earnings of 10%+ over the next two years, this still seems excessive. In fact, it translates to a price-to-earnings growth (PEG) ratio of around 2.4, which is difficult to justify.
Of course, the company’s strategy appears to be sound and its turnaround in recent years has been impressive. As a business, it seems to be attractive and offers a mix between stability and growth. However, the market seems to have become overly enthused about its outlook. This has resulted in a valuation which suggests a share price fall is more likely than a share price rise in the medium term.
Clearly, with the FTSE 100 trading close to an all-time high, big valuations are not uncommon. However, in the case of Rentokil its current price level appears to bear little resemblance to its outlook for 2017 and 2018. As such, it may be best to avoid it at the present time.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended Intertek. 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.