2 growth stocks I'd avoid in 2018
Specialist building products supplier SIG(LSE: SHI) today issued a trading update for the year ended 31 December. It said trading in recent months has been in line with expectations and that "our overall expectations for underlying profitability for the full year remain unchanged." However, the shares are down nearly 5% at 165p, as I'm writing.
Analysts are forecasting earnings per share (EPS) of 9.4p when the FTSE 250 firm posts its final results in March, giving a price-to-earnings (P/E) ratio of 17.6. This comes down to 15 for 2018, with forecasts of 17% EPS growth to 11p. The resulting price-to-earnings growth (PEG) ratio of 0.88 is on the value side of the PEG fair value marker of one, so there's a prima facie case that SIG's share price represents good value for the growth on offer.
Over-ambitious?
The company today reported it had identified "a historical overstatement of cash and trade payables" and as a result, has "initiated a rigorous review of controls around cheque issuance." The overstatement had no impact on the income statement at 31 December 2016 or 30 June 2017 but did flatter the cash and leverage position. However, I don't think this is a huge issue for investors to be worried about.
Going forward, I'm more concerned about the economic environment for the group meeting its chief executive's ambitious margin targets. The company's two operating divisions are the UK & Ireland and Mainland Europe. Margin performance in the UK has been weaker of late, although it's been mitigated by an improvement in confidence in Mainland European markets.
SIG operates in a low-margin industry and historically has struggled to get its net margin even as high as 1.4%. I see the stock as priced for margin-target success but I believe this may be over-ambitious. Brexit uncertainty looks likely to impact UK performance and in a worst-case scenario, the company acknowledges that the final Brexit terms could impact its "ability to conduct its business, or make the conduct of such business more expensive." For these reasons, I rate the stock a 'sell'.
Pedigree for the 21st century?
Another FTSE 250 stock on my 'sell list' is challenger bank Metro(LSE: MTRO). Founded in 2010, on a model its chairman had employed successfully in the US between 1973 and 2007, Metro is busy opening branches, while its rivals close theirs. It aims for high levels of service and convenience, with its stores (as it calls them) open seven days a week, and from 08:00 to 20:00 on weekdays. And it has other quirks: "We love dogs at Metro Bank. We welcome them in all of our stores with fresh water bowls and biscuits."
Like other banks, Metro is set to benefit from rising Bank of England base rates. However, while its business model has been successful in the past across the pond and its current expansion in the UK has been rapid from a standing start, I'm really not convinced that Metro is the future of 21st-century banking. Even if I were, I wouldn't be willing to pay 150 times expected 2017 earnings and over 50 times forecast earnings for 2018. The shares have climbed to more than 3,500p from their flotation price of 2,000p less than two years ago and I believe that now could be a good time to cash in.
Could there be a better growth prospect?
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G A Chester 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.
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