On song

Last Friday’s trading update from music software specialist Focusrite (LSE: TUNE) was more good news for existing holders. 

A trusted brand among amateurs and professionals, Focusrite’s products continue to fly out of warehouses. Trading has been so good that revenue, profits and cash are ahead of where management predicted they would be at this stage of the financial year. As a result, the £600m cap suspects it will exceed current market expectations. It also confirmed it has cleared all bank debt.

Naturally, this good news hasn’t gone unnoticed. The valuation is now 28 times forecast earnings. That’s punchy given the global shortage of semiconductors (of which it uses a lot) and the impact this could have on trading. Another thing to consider is whether Focusrite’s existing holders will begin banking profits as restrictions are lifted. So I’m watching from the sidelines for now.  

Purple patch

It’s hard to talk about quality stocks and not mention Games Workshop (LSE: GAW). After all, the FTSE 250 member has been one of the best performing UK growth shares over the last five years. 

Based on recent trading, it looks like this purple patch can continue. January’s half-year report revealed a 26% rise in revenue and 56% increase in pre-tax profit compared to the same period in the previous year. 

I feel GAW possesses many of the hallmarks of a stonking business. It generates high margins and returns on capital. It’s also cash-rich and the clear leader in a niche market. Once again, however, the valuation is far from cheap at 29 times forecast earnings. Like Focusrite, there’s also a chance trading could normalise once restrictions are lifted. In such circumstances, one might expect food and beverage firms, holiday companies and airlines to make the biggest gains. Fantasy figurine makers? Perhaps not.

Again, I’m not inclined to buy right now but I will be backing up the truck in the event of a sustained fall in the wider market.

Outperforming

The last of the UK growth shares I’d be interested in buying would be ingredients provider Treatt (LSE: TET). Similar to Focusrite and Games Workshop, its shares have been on a tear since the market crash. They’re up 200% in just eleven months.

There’s no shortage of reasons for staying bullish either. Trading in FY21 to date has been “significantly better than expected” and supported by new business wins in the fast-growing global alcoholic seltzer category. This has, in turn, led Treatt’s management to predict that pre-tax profit is now likely to “materially exceed” the £15.1m currently pencilled in by analysts. 

Even so, none of this can be guaranteed. After all, parts of Treatt’s portfolio continue to be affected by the ongoing closure of hospitality venues around the world. A valuation of 38 times forecast earnings also suggests a lot of good news is already priced in. 

It stays on the watchlist for now but if UK growth shares see their prices falling, I’ll jump in.

The post Top UK growth shares to buy if this market bubble bursts appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK owns shares of Games Workshop. The Motley Fool UK has recommended Focusrite and Treatt. 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.

Personally, I don’t think the whole stock market is in a bubble. However, I do believe some areas of the market, such as parts of the US technology sector, are overstretched at the moment. Here’s a look at some bubble indicators that concern me.

Everyone’s a stock expert

Prominent US investor Joe Kennedy once said something along the lines of: “When even shoe shine boys are giving you stock tips, it’s time to get out of the market.” What he meant by this was that when everyone is talking about investing in shares, it’s often a sign that the market has run too far.I

I’ve seen an explosion in the number of YouTubers giving share tips over the last few months. All of a sudden, everyone on YouTube seems to be an expert in shares! Worryingly, a lot of these content makers have very little experience in the stock market. I see this as a bubble indicator.

Euphoria is high

There’s also an incredibly high level of ‘euphoria’ in the market right now. Excitement levels are off the charts.

“We have very seldom seen levels of investor euphoria like this,” said legendary British investor Jeremy Grantham (who has predicted a number of stock market crashes in the past) recently.

High levels of euphoria can be dangerous for stocks. “Bull markets are born on pessimism, grow on scepticism, mature on optimism, and die on euphoria,” said Sir John Templeton.

IPO activity

Recent IPO activity in the US also concerns me. Investors are scrambling to buy new tech stocks with little thought about the actual valuations of these companies. Just look at the Airbnb IPO. Its IPO price was $68. However, the stock opened near $150.

Valuations are extreme

Speaking of valuations, some tech valuations just look way too high, in my view. Take Tesla, for example. Its market cap is currently about $800bn which equates to a valuation of around $1.6m per car sold. It may prove to be justified long term, but it makes no sense to me.

Bubble indicator

Finally, zooming in on the tech sector, I think it’s worth noting that one of the UK’s largest global technology funds, Polar Capital Global Technology, closed itself off to new investors last year due to the enormous demand for tech stocks. After assets under management surged from £2.9bn in March to £4.5bn in June, Polar Capital announced that the fund was ‘soft closed.’ I see this as a contrarian bubble indicator.

Stock market bubble: what I’m doing now

Given these bubble indicators, I think it’s worth focusing on risk management right now. Here’s what I’m doing to protect my portfolio.

Firstly, I’m keeping a close eye on my exposure to expensive growth stocks. I don’t want my portfolio to be overly exposed to these kinds of stocks. 

Secondly, I’m making sure that my portfolio is nicely balanced. Recently, I’ve been boosting my exposure to more defensive names such as Unilever and Reckitt Benckiser. If the stock market falls, these shares should hopefully provide protection.

Finally, I’m stockpiling cash. This will give me firepower to buy great stocks at good prices if the market does pull back in the near future.

The post I see signs of a stock market bubble. Here’s what I’m doing now appeared first on The Twelfth Magpie.

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Edward Sheldon owns shares in Unilever and Reckitt Benckiser. The Motley Fool UK owns shares of and has recommended Tesla. The Motley Fool UK has recommended Airbnb, Inc. and Unilever. 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.

Is my long-held suspicion that the shares are overbought finally ringing true, or is this a mere short-term blip?

Ocado sales soar

This morning’s numbers relate to Ocado’s retail arm — the joint venture it formed with battered former FTSE 100 member Marks & Spencer back in February 2019.

Thanks in part to another lockdown, retail revenue soared 35% over the 13 weeks to 29 November to just under £580m. According to the company, this compares favourably to the normal peaks and troughs experienced before the coronavirus arrived. It also suggests customers have been receptive to the firm’s switch in trading partners, to M&S from Waitrose in September.

Ocado received an average of 360,000 order per week over the period — up 3% from Q4 2019. Despite the additional demand, it was able to achieve “high rates of on-time customer delivery and low rates of substitutions,” according to Retail CEO Melanie Smith. The average order size was £133 — evidence, Ocado believes, that shoppers’ behaviour was continuing to “normalise.“

Priced in?

It seems fair to say Ocado shares have been one of the better FTSE 100 buys in 2020. Those placing the stock in their shopping basket at the beginning of January would be sitting on a gain of around 75%. That’s after taking today’s fall into account! The question is, how much of this good news is now priced in?

Based on this morning’s reaction. I’d say quite a lot, especially as the company raised earnings guidance again today. It now expects full-year earnings to be “over £70m” compared to its previous prediction of over £60m. And yet traders weren’t impressed!

Part of this may be explained by the fuzzy outlook. Within today’s statement, Ocado said sales and earnings growth in the next financial year will depend on how quickly trading normalises. It’s also dependent on when three new warehouses become operational. These are expected to add 40% more capacity to the business.

Market minnow

But is this reaction really that surprising? After all, Ocado is still trading at a loss, due to the huge investment it’s needed to make over the years. As impressive as its operations are, the FTSE 100 company is already valued at over £17bn. That’s the sort of staggering valuation we’d expect from flash (overhyped) US tech stock. Sure, Ocado might utilise market-leading software, but no share is worth buying at any price. 

On top of this, it’s worth remembering Ocado doesn’t operate in a vacuum and the grocery market remains as cut-throat as ever. Depending on how the UK economy fares in 2021, it’s possible more people will switch away from M&S to cheaper options out of necessity.  

It’s not as if Ocado has a commanding presence either. In November, it had just a 1.7% share of the UK market, according to Kantar. FTSE 100 peer Tesco, on the other hand, had 27%. Its valuation is £22bn — only £5bn more than Ocado. 

Considering the above, I’m still giving Ocado shares a wide berth as an investor. For me, there are far better opportunities elsewhere in the market. The bubble may finally be bursting.

The post Ocado shares are falling today. Is this FTSE 100 firm’s bubble finally bursting? appeared first on The Twelfth Magpie.

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Paul Summers 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.

The latest to come out and warn about another crash is legendary British investor Jeremy Grantham, co-founder and chief investment strategist of Boston-based money manager GMO. Grantham – who has a great track record when it comes to predicting stock market crashes – believes that stocks are now in a bubble.

Undeniable economic problems

In an interview with CNBC last week, Grantham said the stock market rally we’ve seen since late March was a “rally without precedence.” He explained that this was the only rally in the history books to take place against a background of “undeniable economic problems.”

Grantham described the market as the most “crazy” he’s seen in his career. In his view, the market is now in bubble territory.

“My confidence is rising quite rapidly that this is, in fact, becoming the fourth, real McCoy, bubble of my investment career. The great bubbles can go on a long time and inflict a lot of pain but at least I think we know now that we’re in one. And the ‘chutzpah’ involved in having a bubble at a time of massive economic and financial uncertainty is substantial,” Grantham said.

Graham also said the market was being driven by “uncontrolled day traders” who are currently out of work and into market speculation. He also noted that investors should have zero exposure to US equities right now.

Stock market crash: how I’m protecting my portfolio

So, what does this mean for investors? Should we be worried about this call from Grantham?

Well, I’m not going to rush out and sell my whole portfolio of stocks simply because Grantham is bearish on the stock market. Realistically, no one knows what the market is going to do in the short term.

That said, when a top investor like Grantham, who warned that stocks were overvalued both in 2000 and 2007, right before big crashes, is saying that stocks are in a bubble, I think it’s worth taking note and thinking about risk management.

I can say I’ve certainly been focusing more on risk management in the last few months as the market has surged. I’ve offloaded a few weaker holdings that could be hit hard if we were to see another crash. Instead, I’ve focused more on high-quality resilient stocks that have strong growth prospects in a post-Covid-19 world.

I’ve also been stockpiling cash recently. Cash is a terrible investment over the long term, but it’s very handy in a stock market crash. That’s because it enables you to pick up stocks at amazing prices when other investors are panicking.

If share prices do crash again, I’ll be ready to capitalise.

The post A legendary British investor says the stock market is in a bubble. Here’s what I’d do now appeared first on The Twelfth Magpie.

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Views expressed 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.

Here’s what I think we need to be asking ourselves.

1. What’s driving this ‘bull market’?

Naturally, there are a few things that have caused this incredible rally in stocks.

First, there’s the financial support instigated by governments around the world in the wake of the pandemic. The ‘whatever it takes’ message has hit home with employers and investors and, for now at least, they like what they hear. 

Second, the coronavirus finally looks to be losing its grip. The number of people testing positive and/or dying has thankfully reduced as social distancing measures and lockdowns appear to have had the desired effect.

Third, the gradual lifting of restrictions has brought with it an inevitable wave of renewed optimism, particularly from those who think they were too draconian anyway, or simply want a proper haircut. 

Fourth, the severity of March’s crash meant a big bounce was always possible. When everyone in the market seems to agree on something, you can be pretty sure it won’t last!

All this is well and good. The more important question for me, however, is whether the rally is sustainable. 

2. Can it last?

Here’s where I start getting gloomy. Regardless of the reassuring platitudes made by those in charge, the financial support provided simply can’t last forever. Moreover, the world is still facing a significant global recession. Many companies will still go to the wall and many jobs will be lost.

We also need to look at who’s buying stocks right now. Based on what we’re hearing from the US, it’s new retail investors, not established professionals. This doesn’t make the former wrong, but it does make me suspect that at least a proportion of those buying now probably won’t be regular readers of company reports!

Knowing this, it’s worth questioning how many will be capable of holding their nerve when current expectations meet with hard economic data. To date, we’ve only been able to estimate the financial impact of the coronavirus. Over the next few months, we’ll see whether these predictions are anywhere approaching accurate. If they are, markets may hang on to recent gains. If theyre not, the recovery could be over.

Last, we need to consider whether the coronavirus will be gone after only a few months. As far as this is concerned, all I know is I don’t know.  

3. Should we avoid buying?

Absolutely not! I’m a fan of buying whatever the economic weather, so long as I know I’m investing for years and my holdings are of sufficient quality. I’m talking about companies with great brands, big market shares, strong management, sound balance sheets, and large operating margins. 

Having said this, I’m also reminding myself that no company is worth buying at any price. So, before clicking that ‘buy’ button, I’m thinking about whether the renewed market optimism is already priced in. For some stocks, I really think this is the case.

Bull market or bubble? My heart whispers the former. My head screams the latter.

The post Bull market or bubble? What should we make of the super stock market recovery? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Paul Summers 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.