FTSE 250 building products’ distributor SIG (LSE: SHI) is the biggest index riser as I write this morning. This adds to the gains it has already made since the start of the ongoing stock market rally.
I reckon that the SHI share price can continue to rise at speed, and can even double from the current levels. There are three reasons for this:
#1. Positive trading update
In its trading update, released earlier today, SIG reported “solid recovery” for the second half of the year. The recovery was also “ahead of… previous expectations”. It also posted a confident outlook for 2021, stating that it expects both organic revenue growth and market share gains. Investors responded positively to the update, making SHI a big gainer in today’s trading.
Considering that its share price is still less than one-third of where it was pre-pandemic, it’s not a stretch to think it can make big gains from here. In fact, it has already doubled once in the past year, in the months following the stock market meltdown.
#2. Stock market rally continues
Overall investor optimism has also helped in buoying the SIG share price. And there’s reason to believe that the stock market rally can continue.
A Brexit deal, successful development of the Covid-19 vaccine, and the fact that the FTSE 250 is still below where it was one year ago are positive indicators.
#3. Policy support for the FTSE 250 stock
British property markets have also received a great deal of government support during the pandemic. It is likely that this may continue. Since SHI is a supplier of construction products like insulation and roofing, it can benefit from the uptrend in real estate as well.
Moreover, over 60% of SHI’s revenues come from Europe-ex UK. The UK makes up for the remaining. In this context, a no-deal Brexit would have been a big challenge for the company, but that has now been successfully averted.
Should I buy this FTSE 250 stock?
The big question now is whether I should buy this FTSE 250 stock. That depends on my investing horizon. In the short to medium run, SIG indeed looks likely to make gains. However, we at the Motley Fool are advocates of long-term investing. To that extent, I think there are a few points to consider:
- Even before the pandemic, SIG’s revenues were falling annually. Its share price increases may not be sustainable on an eroding financial base.
- Brexit-related challenges can show up in the movement of goods between the UK and EU. If this exacerbates, I reckon it will impact the likes of SIG, with big business interests in the continent.
- If the lockdown continues, as does the damage to the economy, property markets may suffer in the months to come especially as policy support is withdrawn. SIG is vulnerable to these potential challenges.
Ultimately, whether I buy this FTSE 250 stock will depend on whether or not I think the broader environment, at the very least, is in its favour or not. I do think that the assessment needs to be made carefully.
Manika Premsingh 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.