Should I Buy These 5 Shares?
LONDON -- I've been popping stocks into my shopping basket in recent weeks, and it's time I took one or two to the checkout. Here are five stocks I've found tempting; should I buy any of them?
Rolls-Royce Holdings is a smooth-running share price machine, up 50% over one year, 200% over five years, and 2,000% over 10 years. As you might expect from the name, you pay a premium price, at nearly 21 times earnings. But you should brace yourself for the odd bump and jolt, with a Serious Fraud Office investigation into malpractice in China and Indonesia. Defense spending is under pressure, as governments pare budgets. Civil aircraft engine sales are cyclical, and could stall in further economic turbulence. There's good news, as well, with predicted modest growth in underlying revenue, and good growth in underlying profit. RR is also celebrating a stream of new orders. Earnings per share (EPS) growth will roughly halve from the stonking 22% seen in 2012, but remains healthy. Shame that it only yields 1.6%. Rolls-Royce still looks like a buy to me, but I will wait for share price weakness. (I might have to be patient.)
ARM Holdings is another 20-bagger over 10 years. It's also up 870% over five years, and 100% over one year, and ... need I go on? This smartphone and tablet chip pioneer keeps beating analyst expectations, which is why it's trading on a whopping 66.6 times earnings, a beast of a P/E ratio. At some point, this has to stop. But who would bet against it? I did, selling three years ago, and have cried myself to sleep ever since. Management has high hopes for its next generation ARMv8, Mali, and big.LITTLE technology, which generate higher royalties. Mighty EPS growth of 37% this year and 24% next also hold out plenty of eastern England promise. Competition is fierce, especially from Intel, chief executive Warren East is stepping down after 19 years, and it ain't cheap. Should you buy? Can you risk not buying it?
When I looked at Wolseley in March, I was deterred by its high valuation and low yield. It's now even more expensive, at 20 times earnings, and the yield is lower still at 1.8%. Yet, this global plumbing merchant has been leaking profits, with half-year results showing an 8.25% drop in group revenue to 6.3 billion pounds. Why so expensive, then? Investors seem to be banking on a rebound in construction, especially in the U.S., where Wolseley earns half its revenues. They liked its decision to flee France, where the losses have flowed. Or maybe they're eyeing the forecast EPS growth, which is 7% in the year to 31 July, and 20% in the year to follow. I'm still not convinced. Plumbers are notoriously expensive, Wolseley is no exception.
What is it with the FTSE 100 today? So many expensive stocks. Here's another one -- Schroders -- beating the lot by trading at 23 times earnings. Two months ago, I said it was expensive at 21.25 pounds. Today, you pay 24 pounds. A strong first-quarter update saw profits before tax up 20%, to 115 million pounds, and booming net inflows of 5.6 billion pounds (up from 1.6 billion pounds in the same quarter last year). Total assets under management have hit 236.5 billion pounds, up nearly 12% since Dec. 31. This fund manager is a play on the bull market, and a hugely successful one. It is up 100% over the past five months, against 25% for the index. This looks like a bull/bear stock to me. Bulls will love it; bears will go into hiding. Which are you?
Standard Chartered sidestepped the worst of the financial crisis, but this hasn't done much for its share price, which is down slightly over three years. That means you can buy it at 10.5 times earnings, half the valuation of the four stocks above. You also get a decent yield at 3.7%, covered 2.7 times. There's a reason for this, with its recent trading update showing a surprise first-quarter slowdown after a strong start, and a small dip in operating profits. Management said the second quarter looked more promising, and it would still hit recent profit guidance, but the damage was done. Standard Chartered is exposed to a China slowdown, which is a worry, with the IMF cutting its Chinese growth forecasts twice in two months. But if you don't buy FTSE 100 companies when they're cheap, when exactly do you buy them? When they're expensive?
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The article Should I Buy These 5 Shares? originally appeared on Fool.com.Harvey Jones doesn't own any of the shares mentioned in this article. The Motley Fool owns shares of Standard Chartered. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.