Sirius Minerals (LSE: SXX) is a stock that has captured the imagination of many UK investors. For years, SXX has been one of the most-traded stocks on the UK market and there’s always plenty of discussion of the stock on bulletin boards.
It’s not hard to understand why Sirius is such a popular pick. The company owns the world’s largest and highest-grade deposit of polyhalite, which is a key ingredient in fertiliser. When you consider the role that fertiliser will play in feeding the rapidly-growing global population in the years ahead, the growth story here becomes apparent. According to the UN, by 2050, the global population is expected to reach 9.8bn people, up from around 7.6bn now, and to accommodate this number of people, more food will have to be produced than ever in history. With Sirius aiming to become one of the world’s largest producers of multi-nutrient fertilisers, the long-term growth story here is certainly exciting. CEO Chris Fraser has said that the project has the potential to “disrupt the global fertiliser market.”
Looking at the popularity of SXX shares, it’s clear that many UK investors are hoping for life-changing gains. But will the stock deliver?
The thing to understand about Sirius is that it’s very much a long-term play. Right now, the company has no revenues or profits and first production isn’t expected until 2021. Furthermore, production isn’t expected to ramp up significantly until 2024. Many setbacks could occur between now and then.
Sure, there’s money to be made by trading in and out of the shares and making a few quid here and there as the share price fluctuates. Yet to my mind, the big gains could still be some years off. With that in mind, Sirius remains a speculative stock in my view, so I won’t be investing for now.
I’ve found over the years that there’s a more consistent way to make money in the stock market and that’s by focusing on companies that are already generating profits. One such company that fits the bill is Dechra Pharmaceuticals (LSE: DPH), an international veterinary pharmaceuticals company that has a market cap of around £3bn and is part of the FTSE 250 index.
Over the last five years, Dechra’s revenues and profits have trended up consistently, and as a result, its share price has climbed significantly higher too, gaining over 300%. That’s more than six times the gains that SXX shares have recorded over that time frame. It shows that consistent profit growth can translate to strong long-term gains for investors.
This morning, Dechra has released a trading update for the year ending 30 June and it appears that the group continues to have momentum. Trading for the year was described as “strong and in line with management expectations,” with reported group revenue up 14% at constant exchange rates. Revenue growth across North America was particularly strong, rising 18% at constant exchange rates.
In my view, the outlook for Decra continues to look promising. With earnings expected to keep growing, there’s potential for the share price to keep climbing. The stock’s forward P/E of 32.7 is certainly not a bargain, however, I’d rather pay a higher valuation for a company that is consistently delivering revenue and profit growth, than buy a stock where the payoff could be years away.
Edward Sheldon 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.