When searching for the best stocks to buy, a double-digit share price dip’s usually a red flag. But occasionally, a perfectly good business gets punished for the wrong reasons. And that’s exactly what I think has just happened to Halma (LSE:HLMA).
The stock fell 15% in a single day last month on the back of its latest results. Yet those same results also contained some of the strongest numbers in the company’s history. So why’s the market panicking, and should investors be doing the opposite?
Record results… but punished anyway
Here’s what the numbers actually said. For the full year ended March, Halma grew revenue 15% to a record £2.58bn, marking its 23rd consecutive year of record profit growth.
Meanwhile, underlying operating income climbed 22% to £594.5m, with margins expanding 110 basis points to 22.7%. This came paired with a 21% bump in underlying earnings per share, paving the way to a welcome 7% increase in dividends – the 47th consecutive year that Halma has hiked shareholder payouts.
By almost any measure, these were exceptional results. So what went wrong?
The problem was guidance. Management signalled that organic revenue growth in its 2027 fiscal year will likely slow to low double digits, down from around 16%. And crucially, its Photonics division, which has been firing on all cylinders, is also expected to slow from around 52% growth to 30%.
It goes without saying, neither of these numbers is terrible. In fact, most FTSE 100 companies would kill to put up this level of growth. But with the market having priced Halma for perfection, this hint of a slowdown was not met positively, resulting in many heading for the exits.
Is the sell-off an overreaction?
Despite the rampant selling activity, the consensus among institutional analysts has been exceedingly bullish. For example, UBS recently reiterated its Buy rating, describing the volatility as an attractive entry point for a proven compounder. And I must agree.
However, even after this tumble, Halma shares are by no means cheap. With a forward price-to-earnings ratio of 31, the market’s still attaching a premium price tag for this business, which could prove problematic should any more signs of a slowdown emerge.
That’s particularly relevant given the concerns of potential spending slowdowns across the sectors Halma serves that could be amplified by a reversal of interest rate cuts – a key risk for investors to watch.
So is Halma a top stock to consider?
For long-term investors who believe in Halma’s compounding model, I think this is exactly the kind of opportunity that rarely presents itself.
Buying a serial compounder at a 15% discount to where it was trading a month ago, while the underlying business is posting record profits, isn’t a common occurrence. And it’s why I plan on adding this business to my compounder portfolio later this month.
Should you invest £5,000 in Halma Plc right now?
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And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Halma Plc made the list?
Zaven Boyrazian does not hold any positions in the companies mentioned.
