2 FTSE 100 stocks I'd dump today

The Motley Fool

One of the biggest influences on your stock market profits is the price you pay for your shares. Even the best companies can be overvalued. Paying too much even for quality stocks can leave you with a portfolio that will underperform the market, as the valuation of your shares returns to more normal levels.

With this in mind, I've been taking a look at two top FTSE 100 performers. These shares have risen by an average of 97% over the last five years. During the same period, the FTSE 100 has gained only 32%. Is it time to take profits?

Struggling for growth

Since the financial crisis, consumer credit rating group Experian (LSE: EXPN) has enjoyed a reputation for delivering safe and reliable profits. The stock has soared and now trades on a forecast P/E of 22, with a prospective dividend yield of just 2.1%.

My concern is that Experian's growth hasn't been as impressive as it first seems. The group's revenue was $4,487m in 2012 and is expected to be $4,624m this year. That's only 3% more. Operating profit was $1,056m in 2012, and $1,075m in 2016/17. That's an increase of 2%.

In a first-quarter trading update today, management said that group revenue rose by 4% at constant exchange rates during the three months to 30 June. A 3% fall in UK sales was offset by gains in the Americas, EMEA and Asia Pacific.

Chief executive Brian Cassin confirmed that full-year revenue growth is expected to be a "mid single-digit" percentage, with stable margins and an increase in adjusted earnings per share.

The firm's share price was flat when markets opened, but it's worth noting that City analysts have already cut their forecasts for Experian several times over the last year. Earnings per share forecasts for 2017/18 have been cut from $1.02 per share one year ago to $0.95 per share today -- a fall of 7%.

In my view, Experian is a good quality company with a long, profitable future. But I'm not convinced that its growth will be strong enough to deliver big profits from today's share price.

A better alternative?

At first glance, accounting software firm The Sage Group (LSE: SGE) appears to be in a similar situation to Experian. Its revenue has grown at a compound average rate of just 1.5% per year since 2011. Last year's operating profit of £300m was 12.7% lower than the £343m reported by the group in 2011.

Sage reported earnings of 19.3p per share in 2016. That's almost unchanged from 19.4p in 2011. Earnings per share would have fallen, but a programme of share buybacks has reduced the group's average share count by 14% since 2011, boosting this key metric.

It seems clear to me that this business has not delivered much underlying growth over the last five years. However, this view may surprise shareholders, whose stock has risen by 123% since July 2012.

Sage stock now trades on a 2017 forecast P/E of 22, with a dividend yield of just 2.3%. If it can deliver the expected adjusted earnings growth of about 10% this year and next year, then the shares could still offer value. But on balance, I think this is a mature business that's too expensive. I wouldn't buy at current levels.

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Roland Head has no position in any shares mentioned.