Knowing when to sell a winning share is one of the most difficult tasks facing any investor. Do you keep your fingers crossed and hope momentum isn't lost, or take profits and risk missing out on further gains?
This is one dilemma that may be facing holders of IRN-BRU maker, AG Barr(LSE: BAG) and meat-packer Hilton Food(LSE: HFG). Over the past year, both stocks have performed admirably, rising 19% and 29% respectively. As expectations rise along with share prices however, are these stocks now overbought?
Running out of fizz?
Back in March, AG Barr revealed an encouraging set of full-year results to the market.
Sales of its key IRN-BRU and Rubicon brands rose 3.2% and 4.9% respectively on an underlying basis, allowing the company to report that it had successfully defended its overall share of the UK soft drinks market. The 27% revenue growth seen in its Funkin cocktail mixer range was also more-than-encouraging.
Overall, these figures saw the company realise a 4.4% rise in statutory profit before tax of just over £257m. In addition to reporting that a reorganisation of the business had reduced its overhead base by around £3m, management also announced a share repurchase programme of "up to £30m".
For those who seek out companies with robust balance sheets, AG Barr now more-than ticks the box. In contrast to the previous year's net debt position of £11.3m, the company ended the financial year with positive net cash of almost £10m.
So what's my problem with the Cumbernauld-based business? Simply that EPS growth over the next year is forecast to be even lower than in 2016 at under 1%. Contrast that with 2015's 6% rise.
This slowdown, when coupled with the company's lofty valuation, leads to price/earnings-to-growth (PEG) ratios of 3.2 for 2018 and 3.5 for 2019. Given that anything under one signals great value, it might be argued that AG Barr's recent share price gains aren't completely justified.
Moreover, while I think concerns over the sugar tax have been overdone (especially as 90% of its brands contain less than 5g of the sweet stuff per 100ml, according to the company), there's also the possibility that market sentiment on AG Barr may reverse as we approach the tax's introduction next April.
Like AG Barr, shares in Hilton have put in a stellar performance over the last 12 months, rising 29%.
Full-year figures for 2016, announced at the end of March, painted a positive picture of the business. Revenue and operating profit rose by 7.2% and 11.7% respectively on a like-for-like 52-week constant currency basis with basic earnings per share rising 15.4% to just under 34p.
With a new factory being built in Australia, expansion into fresh pizza production in Sweden and Central Europe, and a meat trading business launched in the UK, this is one company that certainly isn't standing still.
Trouble is, last year's 20% earnings per share growth is expected to be less than half that in 2017, before dipping to 5% in 2018. This leaves the shares trading on rather steep valuations of 21 and 20 times earnings respectively. Based on PEG ratios for the next two years (four and 4.4), investors are now paying an awful lot relative to the amount of growth expected.
So, while I wouldn't be surprised if Hilton's next trading update caused a further (temporary) rise in the share price, I suspect that last year's performance isn't about to be replicated.
Make no mistake
To be clear, there's a lot to like about both AG Barr and Hilton. Right now however, I'm beginning to wonder if it might be prudent to take some money off the table. Sticking with top performing companies doesn't always work out well, particularly if valuations have got out of control.
If you're looking to avoid making this and similar mistakes during your investing career, I strongly encourage you to read a special report from the analysts at the Motley Fool.
Paul Summers has no position in any shares mentioned. The Motley Fool UK has recommended AG Barr. 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.