With the stock market trading near an all-time high, I expect many investors are holding off from making many new investments. Stock valuations have become a bit stretched in recent months, and I'm waiting for the market to offer a discount before I buy into these two companies.
Dominant market position
Rightmove (LSE: RMV), the UK's most visited portal for property listings, is a company that benefits from a wide economic moat.
The site's dominant market position has only strengthened since the launch of OnTheMarket, a competing online property portal, in 2015. The newer group, which was set up by a consortium of traditional estate agents to combat the dominance of Rightmove and Zoopla, only allows its members to list their properties on one additional online portal. Due to Rightmove's larger audience base, this has often come at the expense of Zoopla, which explains why Rightmove's market share has increased to 77%, up from 74% in 2015.
Rightmove's unique IP advantage, combined with its relatively static cost structure, means the company generates steady recurring revenues and impressive margins. For 2016, underlying EPS gained 18%, while revenues rose 15% and operating margins widened to 75.5%. Its customers are also choosing to spend more as average revenue per agent rose 12% to £842 per month, thanks to increased adoption of its new 'Optimiser' package, which helps agents to increase their property exposure and lead generation on the site.
However, I'm concerned about the cyclical headwinds that may affect the company. With uncertainty surrounding Brexit, the property sector seems to be slowing down. As such, City analysts expect earnings growth to fall to a high-single digit rate over the next two years.
Rightmove's valuations have come under pressure in recent months, but its shares still trade at 25.8 times forward earnings. Although that's still a discount to its five-year historical average of around 28 times, I'm holding off an investment in Rightmove until its shares trade closer to 20 times forward earnings.
Strong underlying profitability
Lloyd's insurer Beazley(LSE: BEZ) is an easy stock to overlook, but this under-the-radar company has delivered a total return of more than 300% over the past five years.
Beazley's robust underwriting performance is what underpins the insurer's strong underlying profitability. The insurer has a respectable underwriting track record, and has consistently outperformed many of its peers on its combined ratios.
With a combined ratio of 89% in 2016, Beazley reported a 3% increase in pre-tax profits, despite the rising competitive pressures in the industry. Additionally, investors benefitted from improved sterling earnings translation, which helped earnings per share to increase by 11% to 35.5p.
Meanwhile, Beazley is also attractive from an income standpoint as the insurer frequently returns excess capital to shareholders through the payment of special dividends. Although the special dividend was reduced from 18.4p last year, to 10p, the group also raised its full-year dividend to 10.5p, up from 9.9p.
Nevertheless, valuations have become a little stretched in recent months. The stock currently trades at 13.7 times forward earnings, which is above its five-year historical average of 10.5 and the sector average of 13.
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Jack Tang has no position in any shares mentioned. The Motley Fool UK has recommended Rightmove. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.