With the FTSE 100 trading close to 8,000 points at the present time, it’s perhaps unsurprising that a number of shares are beginning to look overvalued. After all, investors are in bullish mood and, in some cases, they’re factoring in growth potential over a long-term time period. This means there may be a lack of capital growth potential over the medium term.
With this in mind, here are two shares that may be worth avoiding at present. Neither seems to offer the best opportunity to help you generate high returns so that you can retire before 65.
Reporting on Tuesday was provider of high technology products and systems for industry and research, Oxford Instruments (LSE: OXIG). The company’s results for the year to 31 March saw it deliver adjusted profit before tax growth of 34.3%, to £42.3m from £31.5m in the previous year. And with its reported order book of £134m, 5% higher than at the same time last year, it seems to be in a strong position to deliver further growth.
The company’s current strategy seems to be performing well. It has invested heavily in research and development, while transitioning to a more commercially-focused operation as it seeks to address a broad range of industrial and academic markets.
Looking ahead, Oxford Instruments is expected to report a 5% rise in earnings for the current year, followed by further growth of 7% next year. While impressive, this rate of growth appears to have been fully factored in by the market, with the stock trading on a price-to-earnings growth (PEG) ratio of 3.6. As such, it seems to be a stock to avoid, despite its improving financial performance.
Also seemingly overpriced at the present time is accounting and payroll software specialist Sage (LSE: SGE). The company’s share price has been volatile in recent months, with it warning in April that sales for the current year would be lower than previous guidance. Its operational execution, as well as a slowdown in its French business, have caused challenges in the recent past, with investor sentiment declining in response.
Still, the stock has a price-to-earnings (P/E) ratio of around 23 at present. This is despite a reduction in its growth outlook, with the stock now expected to report a rise in earnings of 8% in each of the next two financial years.
Clearly, Sage has a solid track record of growth. Its business model, while evolving towards a subscription-based focus, has remained robust in recent years and this has allowed it to generate positive earnings growth in each of the last five years. However, with a high valuation and a narrow margin of safety, it appears to be another company to avoid at the present time.
Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has recommended Sage Group. 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.