Should you hang on to your winning shares and hope they’ll climb ever higher? It can be tempting, but I always say you should keep an eye on valuation — because overvalued risers almost always fall eventually. But how have the FTSE 250‘s biggest winners been doing?
Shares in Hikma Pharmaceuticals (LSE: HIK) went through a slump in 2017, but 2018 has been a year of solid recovery and the price has risen by 51% year-to-date.
After three years of falling earnings, analysts are predicting a return to growth this year with an EPS gain of 21%, followed by a further modest 3% in 2019. That would put the shares on P/E multiples of around 15.5 to 16, which looks like good value to me if the recovery is set to continue.
A trading update from the global pharmaceuticals company in November told of strong performance across its three main divisions, Injectables, Generics and Branded. That boosts my confidence, as I’m always wary when a firm is mostly doing fine but one division is perhaps underperforming. The firm lifted its full-year guidance, and I can’t help feeling that forecasts for 2019 deserved to be uprated too.
Today’s valuation comes after the shares have fallen from their 2018 peak, when the price was up more than 80% year-to-date. My verdict: buying opportunity.
We also had an impressive recovery in 2018 from power plant operator Drax (LSE: DRX). The shares dipped in 2017, but since the start of this year they’ve gained 30%, even after a minor retrenchment since mid-November.
Part of Drax’s renewed success is its pioneering work on renewable energy sources, with plans to convert all of its coal-fired plants by 2025. It was a tough process, mind, and the restructuring hit profits hard — the company recorded a pre-tax loss in 2017. On top of that, the dividend was almost wiped out, yielding just 0.7% in 2016.
But it all seems to be coming together now, with a decent dividend reinstated last year (to yield 4.5%), and there are inflation-busting progressive rises on the cards for 2018 and 2019. As the shares have regained value this year, the dividend yield still stands at 4.5% on 2019 forecasts.
And we’re looking at a predicted 2019 P/E of under 11 too, with attractive growth forecasts. My verdict: growth plus dividends.
There’s been no recovery necessary at AG Barr (LSE: BAG), whose shares are up 23% year-to-date — and over the past two years, we’ve seen an impressive 59% gain.
The soft drinks company has been pulling in steady earnings for years and paying regular dividends, even if yields are modest. Forecasts suggest around 2%, which might not look too attractive, but the bigger picture shows its progressive nature.
Dividends will have grown by 46% in five years if forecasts for the current year prove accurate, and that’s wiping the floor with inflation. In fact, if you’d bought in early 2017 just before the share price rise kicked in, you’d have secured an effective dividend yield of 3.2% this year. That’s the beauty of progressive dividends — future yields.
Barr shares trade on P/E multiples of around 25, but a high rating like that is fairly common for a safe stock, and I think that’s a reasonable valuation. My verdict: defensive cash cow.
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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended AG Barr and Hikma Pharmaceuticals. 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.