Buying shares in companies which have delivered high capital gains in the recent past may sound counterintuitive to many investors. After all, such stocks will have narrower margins of safety and this could mean more downside and less upside potential.
However, the reality is that many stocks can continue to make major gains even after a purple patch. As long as their valuations remain sensible, then buying them can prove to be a sound move. Here are two companies which appear to fall neatly into that bracket.
Reporting on Monday was lifestyle brand Supergroup(LSE: SGP). The company's results for the full year showed further progress has been made with its strategy. Under the current management team, it has sought to expand and diversify its operations, while becoming increasingly efficient.
The effect of this has been a rise in sales of 27.4%, with underlying earnings gaining 17.4% on a per share basis. The company seems to have benefitted from a multi-channel approach. It has sought to broaden its sales channels, with its Wholesale business now a more prominent part of the business. Similarly e-commerce has undergone further investment, while the firm has expanded into new territories and become increasingly innovative in terms of the range of its products.
Looking ahead, Supergroup is expected to grow its bottom line by 13% in both the current year and next year. This puts its shares on a price-to-earnings growth (PEG) ratio of just 1.1, which suggests they offer growth potential at a reasonable price. That's despite their rise of 26% during the last year. As such, while they may not have as much capital growth potential as a year ago, they continue to offer a logical investment outlook.
Also rising significantly in the last year have been shares in Burberry(LSE: BRBY). They have easily outperformed Supergroup and are now 42% higher than they were a year ago. At least some of this gain is due to the weaker pound. Burberry operates mostly abroad, and its key markets remain places such as China, the US and other major world economies. Therefore, it has benefitted from a depreciating pound in the last year, with a positive foreign currency translation being the result.
However, Burberry has also made changes to its business that have positively impacted on its performance. Efficiencies and cost savings seem to have been welcomed by the market, while its change in management structure may also lead to a better-organised business over the medium term.
Looking ahead, Burberry is expected to grow its bottom line by 12% next year. This puts it on a PEG ratio of 1.5. Given its size, scale and diversity, this appears to be a low price to pay. Furthermore, the company has a high degree of customer loyalty which may make its overall performance and returns more sustainable than some of its sector peers in the long run.
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Peter Stephens owns shares of Burberry. The Motley Fool UK has recommended Burberry and Supergroup. 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.