2 growth stocks I’d avoid in 2018

Forecasts of tremendous earnings growth don’t always make a stock good value, says G A Chester.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Specialist building products supplier SIG (LSE: SHI) today issued a trading update for the year ended 31 December. It said trading in recent months has been in line with expectations and that “our overall expectations for underlying profitability for the full year remain unchanged.” However, the shares are down nearly 5% at 165p, as I’m writing.

Analysts are forecasting earnings per share (EPS) of 9.4p when the FTSE 250 firm posts its final results in March, giving a price-to-earnings (P/E) ratio of 17.6. This comes down to 15 for 2018, with forecasts of 17% EPS growth to 11p. The resulting price-to-earnings growth (PEG) ratio of 0.88 is on the value side of the PEG fair value marker of one, so there’s a prima facie case that SIG’s share price represents good value for the growth on offer.

Over-ambitious?

The company today reported it had identified “a historical overstatement of cash and trade payables” and as a result, has “initiated a rigorous review of controls around cheque issuance.” The overstatement had no impact on the income statement at 31 December 2016 or 30 June 2017 but did flatter the cash and leverage position. However, I don’t think this is a huge issue for investors to be worried about.

Going forward, I’m more concerned about the economic environment for the group meeting its chief executive’s ambitious margin targets. The company’s two operating divisions are the UK & Ireland and Mainland Europe. Margin performance in the UK has been weaker of late, although it’s been mitigated by an improvement in confidence in Mainland European markets.

SIG operates in a low-margin industry and historically has struggled to get its net margin even as high as 1.4%. I see the stock as priced for margin-target success but I believe this may be over-ambitious. Brexit uncertainty looks likely to impact UK performance and in a worst-case scenario, the company acknowledges that the final Brexit terms could impact its “ability to conduct its business, or make the conduct of such business more expensive.” For these reasons, I rate the stock a ‘sell’.

Pedigree for the 21st century?

Another FTSE 250 stock on my ‘sell list’ is challenger bank Metro (LSE: MTRO). Founded in 2010, on a model its chairman had employed successfully in the US between 1973 and 2007, Metro is busy opening branches, while its rivals close theirs. It aims for high levels of service and convenience, with its stores (as it calls them) open seven days a week, and from 08:00 to 20:00 on weekdays. And it has other quirks: “We love dogs at Metro Bank. We welcome them in all of our stores with fresh water bowls and biscuits.”

Like other banks, Metro is set to benefit from rising Bank of England base rates. However, while its business model has been successful in the past across the pond and its current expansion in the UK has been rapid from a standing start, I’m really not convinced that Metro is the future of 21st-century banking. Even if I were, I wouldn’t be willing to pay 150 times expected 2017 earnings and over 50 times forecast earnings for 2018. The shares have climbed to more than 3,500p from their flotation price of 2,000p less than two years ago and I believe that now could be a good time to cash in.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

G A Chester has no position in any of the 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.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »