In this article I’m going to look at a stock that’s just fallen out of the FTSE 100 and rejoined the FTSE 250 mid-cap index.  I think this well-established company has the potential to get much bigger. I’m also going to consider a small company that’s impressed me with its profitability and growth, but could suffer during a UK recession. Is now the right time to buy?

A dividend growth star?

The share price of FTSE 250 firm Hikma Pharmaceuticals (LSE: HIK) has risen by more than 250% over the last 10 years. Although the firm is currently going through a period of slower growth, I believe this business enjoys strong fundamentals that should make it an attractive long-term investment.

Hikma’s specialism is generic medicines. These are cheaper alternatives to branded products whose patent protection has expired. The market for generics is very large and important, as many treatments remain essentially unchanged for decades.

Making such medicines available more cheaply is attractive to large purchasers such as the NHS. It also helps to open up new sales opportunities in emerging markets. This is a key area of strength for Hikma, which operates in the Middle East and North Africa, as well as the US and Europe.

I’m attracted to Hikma’s strong record of cash generation and low debt levels. In contrast to larger rivals AstraZeneca and GlaxoSmithKline, Hikma’s dividend is covered more than three times by earnings and looks very safe to me.

Indeed, since the firm’s first dividend payment in 2006, the payout has been held or increased every year. Last year’s payout of $0.38 per share was a 1,700% increase on the firm’s maiden dividend in 2006.

The shares have fallen back a little this year. They now trade on about 14 times forecast earnings, with a 1.9% dividend yield. I believe this could be a good entry point for long-term investors.

Motoring ahead

Another overlooked dividend growth stock I’m keen on is used car supermarket chain Motorpoint Group (LSE: MOTR). This firm is the UK’s largest independent used car specialist, with a network of 12 car supermarkets. Motorpoint only sells cars under three years old and with less than 25,000 miles on the clock.

I’ve been impressed by Motorpoint’s performance since its flotation in 2016. Customers seem to like it too — 30% of sales are to repeat customers.

Although growth slowed last year, sales topped £1bn for the first time and adjusted pre-tax profit rose by 10% to £22.9m. Cash generation remains excellent, thanks to the group’s low costs and financial discipline.

In my view, this is a very well-run and focused business. The main risk I can see is that profits are very sensitive to small changes in sales. When sales are rising, this is good news. But my sums suggest that a 5% fall in sales could cause operating profit to fall by as much as 15%.

Trading on 11 times forecast earnings and with a 3.5% yield, the shares don’t look expensive. But I’d only consider buying this stock if you’re confident about the outlook for the UK economy. Personally, I’d rate Motorpoint as a hold for now.

The post An overlooked ex-FTSE 100 dividend stock I’d buy and hold forever appeared first on The Twelfth Magpie.

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Roland Head owns shares of GlaxoSmithKline. The Motley Fool UK has recommended AstraZeneca, GlaxoSmithKline, Hikma Pharmaceuticals, and Motorpoint. 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.

There’s no doubt in my mind that the housing market does face an uncertain outlook. But a crash isn’t a foregone conclusion.

Interest rates are still low, making mortgages affordable. Demand for new housing remains strong, with big rental landlords adding to demand from private buyers. I think it’s worth asking if this sell-off may have gone too far.

A 10% dividend yield

Like most of its peers, Persimmon is generating huge amounts of cash. My sums suggest free cash flow of £816m over the 12 months to 30 June. Of this, £728m was returned to shareholders through dividend payouts.

These cash returns are expected to continue. The group ended the first half of the year with forward sales of £2,120m, 6% higher than one year earlier. Management has committed to pay “at least 235 pence per share to shareholders each year” in 2019 and 2020.

This guidance gives the stock a whopping forecast dividend yield of 10% at current levels.

What could go wrong?

Net cash edged higher to £1,155m during the first half. This should be enough to cover the £1,090m of dividends scheduled for the remainder of this year and 2019. If profits remain stable, there’s no doubt in my mind that this stock is far too cheap.

The main risk I can see is that with an operating margin of 28%, this builders’ profits must surely be close to a peak.

If the housing market does start to slow, Persimmon’s share price could move rapidly down towards its net asset value of 906p per share — less than half the current share price of 2,300p.

Personally, I’m wary about house-builders. I don’t expect Help to Buy to be withdrawn without some kind of phasing-out period, but I do think the market looks expensive generally.

I’d continue to hold Persimmon for income, but I’d be reluctant to buy more.

One cyclical stock I own

New car registrations are down by 7.5% so far this year, according to data from the Society of Motor Manufacturers and Traders. After several years of strong growth, there seems to be some risk of a downturn in the new car sector.

However, used car sales appear to be holding up well, and this is an area where I have invested some of my own cash. My stock of choice is car supermarket Motorpoint Group (LSE: MOTR). This firm is the UK’s largest independent car dealer. It only sells cars under three years old and with less than 25,000 miles on the clock.

Still motoring ahead

In a trading update this morning, Motorpoint said that sales rose by 9% during the six months to 30 September. No new sites have been opened over the last year, so this suggests that trading is improving at the group’s existing locations.

Profit margins for the period are said to be “similar” to those seen last year, which sounds fine to me. Historically, this business has generated very attractive returns, as I’ve explained previously.

Today’s news has added 4% to Motorpoint’s share price at the time of writing. This puts the shares on 11 times 2018/19 forecast earnings, with a 3.4% yield. I’d keep buying at this level.

The post A FTSE 100 stock yielding 10% that looks absurdly cheap right now appeared first on The Twelfth Magpie.

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Roland Head owns shares of Motorpoint. 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.

In this piece I’m going to discuss why these companies are performing so differently, and which one I’d rather buy.

Too cheap to ignore?

Car dealers look cheap at the moment and Lookers (LSE: LOOK) is no exception. The company confirmed this morning that it’s on track to hit consensus profit forecasts for the full year. If that’s correct, then the shares currently trade on just 7.8 times forecast earnings and offer a yield of 3.8%.

Why so cheap? One reason is that profits appear to be falling. Despite turnover rising by 5% to £2.58bn, the group’s adjusted pre-tax profit fell by 14% to £43.1m during the six months to 30 June.

UK new car registrations have fallen by 5.5% so far this year, compared to the same period last year. But Lookers reported growth in used car sales and aftersales, and the group’s gross profit for the period rose by 2.5% to £270.5m.

The main reason for the fall in profit was a big increase in administrative costs, which rose by 26% to £80.4m during the first half. The company says this was due to increases in salary, pension, rent and utility costs.

Interest costs for stock financing also rose and I suspect interest rates for car buyers will soon follow. This could slow new car sales even more.

I’m still waiting

Lookers has a decent balance sheet, helped by about £340m worth of property, plant and equipment.

But adjusted earnings are expected to fall by 7% to 13.5p per share this year. And after years of record sales, I fear the downturn in the new car market might only just be getting started. I’m avoiding new car dealers for now.

One car dealer I do own

There is one car business I am bullish about. Used car supermarket Motorpoint Group (LSE: MOTR) is the largest used car retailer in the UK.

I’m a shareholder of this FTSE 250 business, which only sells cars that are under three years old and have less than 25,000 miles on the clock.

By selling from 12 large outdoor sites, costs are relatively low and returns can be high. Although the group’s operating margin last year was just 2.1%, Motorpoint generated a return on capital employed of 76%. So for every £100 of capital invested in the business, the firm generated £76 of operating profit. That’s outstandingly good.

What could go wrong?

Customers seem to like this business. An impressive 26.2% of sales were to repeat customers last year, and the company scores highly on internet review sites.

The main risk I can see is that the company will be caught out by a combination of falling used car values and a slump in demand. This might be made worse by rising interest rates.

In fairness, there’s no sign of any problem yet. Adjusted earnings per share rose by 31% to 16.7p per share last year. Analysts expect this figure to rise by 14.4% to 19.1p during the current year, putting the stock on a forecast P/E of 11.9 with a prospective yield of 3.1%.

I believe Motorpoint could continue to drive ahead of the FTSE 100 and remain happy to hold.

The post Why this small-cap dividend growth stock is storming ahead of the FTSE 100 appeared first on The Twelfth Magpie.

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• 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?

Roland Head owns shares of Motorpoint. 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.

Motoring ahead

Revenue popped 20.6% to £991.2m as the company attracted record levels of repeat customers to its sites — increasing to 26.2% from 25% the year before. Given that people tend to change cars irregularly, that’s rather impressive. The fact that more appear to be opting for nearly-new over new cars also helped pre-tax profit rise just under 71% to £20m over the year to the end of March.

So, why the big fall? A lot of it could be due to a downgrade from broker Numis from ‘Buy’ to ‘Add’. While remaining positive on the stock, the broker stated that the shares have had a great run having climbed 75% in value in just 12 months. Based on adjusted basic earnings per share of 16.8p (up 32.3% from the previous year), Motorpoint’s shares were valued at a trailing price-to-earnings (P/E) of 15.5 before today. That’s high relative to industry peers.

Another reason could be management’s cautious — but actually eminently sensible — comments on the small-cap’s outlook. Despite being focused on expansion and gaining market share (Motorpoint opened its 12th site in April last year), CEO Mark Carpenter highlighted the company’s desire to remain “mindful of the wider economic and political climate“. With Brexit on the horizon, that’s no bad thing.

While the upside may be more limited going forward, it’s hard to deny that the firm looks in rude health. The company boasts consistently decent returns on the money its invests, even if margins in this sort of business are naturally rather low. Cash flow more than doubled in the last year from £7.4m to £20.2m. And while this year’s total dividend of 6.6p equates to a fairly average trailing yield of 2.7% (taking into account today’s share price fall) — the 57% rise on 2016/17’s payout is certainly indicative of a company reaching for a higher gear.

A less risky alternative?

Given the level of competition in the industry, those put off by relatively frothy valuations in some car retailers may prefer to invest in automotive marketplace Auto Trader (LSE: AUTO).

Shares in the £4bn cap FTSE 250 constituent have been on sparkling form over the last few days after the company announced a reassuring set of numbers to the market. In brief, revenue moved 7% higher to £330.1m in the 12 months to the end of March with pre-tax profit climbing 10% to £210.8m.

These positive figures were largely the result of retailers and manufacturers taking advantage of new products launched by the Manchester-based business in the last year. Its Dealer Finance product, for example, is proving popular and 69% of those eligible are electing to pay for it.

While the aforementioned economic uncertainty is likely to continue impacting on the number of private listings on the company’s site, trading in the new financial year appears fine, with the company stating that it was “confident of meeting its growth expectations for the year“.

Taking into account its huge market share, declining debt levels and sky-high returns on sales, Autotrader still looks worthy of investment at 21 times earnings. 

The post Here’s why this small-cap’s share price rise has stalled today 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 recommended Auto Trader. 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.

Motorpoint only sells cars that are under three years old and have less than 25,000 miles on the clock. So these cars are a good alternative to buying new, with many still having manufacturer warranties.

This could be an opportunity

Listed new car dealership groups have generally performed poorly over the last year, as new car sales have slowed.

Figures released this week by the Society of Motor Manufacturers and Traders (SMMT) show that this decline continued last month. New car sales fell by 15.7% to 474,069 in March, compared to the same month last year. March 2018 sales were also lower than in 2015 and 2016.

For franchised dealers these figures are a concern. But they may represent an opportunity for Motorpoint. The company said today that it expects to report full-year revenue growth of more than 18%, helped by the opening of a 12th site at Sheffield. 

The biggest risk for investors is probably that used car prices could fall, decimating profits. So far this doesn’t seem to have happened. Motorpoint said today that gross profit margins per car sold “remained stable throughout the year”.

As a shareholder, I’ll be taking a closer look at Motorpoint’s financial performance when its full-year results are released in June. But based on the information provided today I’m happy to continue holding the stock.

I estimate that after today’s gains, the shares trade on a forecast P/E of 13.5 with a prospective yield of 2.4%. I believe this stock may still rate as a growth buy.

I might look overseas

The problem with Motorpoint and most other listed car dealers is that they’re dependent on UK car sales. So if the UK economy slumps after Brexit, business could be tough for a while.

One way to play this risk is to invest in a company that sells cars overseas, such as Inchcape (LSE: INCH).

This group does sell cars in the UK, but its main focus is overseas distribution. This means it partners with car manufacturers to take complete responsibility for logistics, marketing and retail operations in the territories where it operates. Doing this means that car manufacturers don’t have to set up their own independent operations in each country.

Distribution appears to be a more profitable business than operating franchised dealerships. I believe it also has greater growth potential. Inchcape operates in some of the world’s fastest-growing car markets, such as Asia and South America, where car ownership levels are still much lower than in the UK.

Stunning financials

Last year saw revenue climbing 14% to £8.9bn and adjusted pre-tax profit rose 9.5% to £382.5m. Operating margin was stable at 4.6% and free cash flow rose by 64.8% to £313.9m. Return on capital employed rose from 15.2% to 19.9% — a very creditable result.

I believe the geographic diversity of Inchcape’s business means that it’s likely to deliver a very stable performance over the next few years. The stock currently trades on a forecast P/E of 11 with a prospective yield of 3.7%. In my view, this looks like a low-risk buy for dividend growth investors.

The post 2 dividend growth stocks that could help you become an ISA millionaire appeared first on The Twelfth Magpie.

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• 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?

Roland Head owns shares of Motorpoint Group. 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.

I believe one of these stocks currently offers excellent value and I rate it a ‘buy’. I see the other as having hidden risks that lead me to give it a place on my ‘sell’ list.

Re-rating potential

Formerly a growth stock for a good number of years, Goodwin’s annual earnings advances ground to a halt — nay, went into reverse — in the wake of the oil and metals prices crash. The company said in its recent half-year results that while oil has recovered to over $60 a barrel and iron ore to over $60 a tonne, “there is little reason to expect an upturn in the release of orders for new capacity in these capital equipment-needy markets until 2020.”

However, Goodwin hasn’t been idle in winning business in new markets, such as nuclear recycling and decommissioning, while its refractory engineering business is also growing. Established in the nineteenth century and still run by descendents of the founders, the company is prudently managed to be resilient through cyclical downturns. It’s remained profitable and maintained its dividend during the recent challenging period. Net debt remains relatively conservative at £27m, particularly as we’re at the bottom of a cyclical trough.

A trailing 12-month earnings multiple of 23 may not appear particularly good value but investors are beginning to recognise that the company is returning to growth. A measure of the potential re-rating over the next few years is that the current share price represents less than eight times previous peak earnings. For these reasons, I rate the stock a ‘buy’.

Downside risk

On the face of it, Motorpoint’s trailing 12-month earnings multiple of 13.8 appears reasonable value and its balance sheet solid, with £21.4m cash and no debt. However, I have several concerns that persuade me to rate the stock a ‘sell’.

Car sales have boomed in the easy credit environment since the financial crisis. The numbers and proportion sold via financing deals have risen mind-bogglingly. And of course, companies involved in flogging cars have seen terrific increases in their profits.

From time to time you get a spate of stock market flotations in a particularly ‘hot’ sector that often turn out to be at or near a cyclical high. Motorpoint’s flotation last year followed those of Auto Trader and BCA Marketplace (owner of WeBuyAnyCar) the year before. However, this year, new car sales have fallen off a cliff and sales of second-hand vehicles dipped for a second successive quarter in July-September.

As well as being exposed to the general state of the economy, Motorpoint relies on various finance facilities to fund its operations, including stock financing secured against its retail vehicle stocks. It concedes that a change in pricing, facility limits etc “could significantly constrain the Group’s ability to trade or the Group could be required to dispose of assets at below their market value or at a substantial discount.”

The company had £90m of inventory at its latest balance sheet date, as well as other assets that could be adversely impacted by falling sales and prices. I see risk of a significant downturn, which isn’t discounted in the current share price.

The post One FTSE SmallCap Index growth stock I’d buy, and one I’d sell appeared first on The Twelfth Magpie.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Goodwin. 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 retailer advised today that revenues jumped 18% during the six months to September to £483.2m and, as a result, profit before tax and exceptional items boomed 64% to £10.5m.

The result prompted chief executive Mark Carpenter to comment: “Whilst market conditions are always subject to external changes, the supply of stock coming into the business remains good and management are comfortable with the Group’s trading performance so far in [the second half].”

The solid first-half performance prompted Carpenter to advise that the firm remains on track to hit its full-year targets.

Drive away

At the moment, the City doesn’t harbour any worries on Motorpoint’s earnings outlook in the near term and beyond. Indeed, current broker consensus suggests that a 29% profits advance is on the cards for the year to March 2018. What’s more, an extra 15% rise is forecast for fiscal 2019.

News that these forecasts translate through to exceptionally low paper valuations may draw plenty of share pickers in, too. On top of a forward P/E ratio of 10.9 times, a reading that falls below the widely-accepted value watermark of 15 times, the car dealer also sports a corresponding sub-1 PEG multiple of 0.4.

Still, recent data from the British car market suggests that these heady growth estimates could be in line for swingeing downgrades.

Latest numbers from the Society of Motor Manufacturers and Traders (SMMT) this month showed sales of second-hand vehicles fell for the second successive quarter in July-September, with 2,102,078 vehicles driving off the forecourt. This was down 2.1% from the corresponding 2016 period.

Demand for used autos, unlike those for brand new models, is clearly not in freefall. But Q3’s figures show that consumer appetite for cars is steadily worsening (sales of second-hand cars fell by a more modest 0.7% in the second quarter).

Motorpoint’s share price performance has been impressive against this backdrop with the retailer’s market value ballooning by 37% during the past two months.

But I reckon investors should take this opportunity to book profits given that broader economic pressures could drive demand for big-ticket items like cars into the dirt, looking down the road. And Motorpoint’s rising cost case causes further alarm as cost of sales jumped 17% in the first half to £445m.

In a hole

Like Motorpoint, Petra Diamonds (LSE: PDL) is also tipped to deliver stunning earnings growth. After being bitten by three consecutive annual earnings slides, it’s finally anticipated there will be a move in the right direction, with a 149% rebound in the period to June 2018.

Such a forecast creates a mega-low P/E ratio of 6.9 times, too, but I reckon investors should give the digger a wide berth today.

Sure, Petra Diamonds received good news in late September when Tanzania lifted an export embargo and striking workers returned to work.

But all things considered, I believe the mining giant carries far too much risk right now. Indeed, a pretty uncertain production outlook (stones output fell 4% to 1,053,817 carats during July-September due to operational issues at its Finsch asset and Kimberley Ekapa joint venture) signals that diamond prices are back on the defensive. Include news last month that the company is on the verge of breaching debt covenants and both negatives should deter investors from ploughing into Petra Diamonds.

The post 2 growth stocks I would avoid like the plague appeared first on The Twelfth Magpie.

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• 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?

Royston Wild 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.

Small and mid-cap broker Numis (LSE: NUM) is far from a household name but with a 4% dividend yield, attractive valuation of 12 times forward earnings and decent growth prospects, it may be wise to take a closer look at the company.  

Numis has found success in recent years in hoovering up small and mid-cap clients that more established rivals have turned away from to focus on larger, more profitable accounts. This has worked out just fine for Numis as it has found these clients a steady source of income from research, broking and advisory services.

In the year to September, a rebound in corporate transactions and an uptick in trading services from a bundle of new clients increased revenue by 15% year-on-year (y/y). This performance was heavily weighted to the second half of the year, which bodes well for the coming quarters as buoyant equity markets increase IPO volumes.

Looking forward, there are challenges approaching for Numis and the sector as a whole. Aside from the cyclical nature of the industry, the most evident is the new Mifid II EU regulations that are seeking to bring clarity to the traditionally opaque world of how asset managers account for and bill payments to brokers for research. This helps explain why Numis has made such a big push into offering a broader range of services in recent years.

However, these changes have been known for some time and Numis feels prepared to tackle them. Furthermore, the company’s dividend prospects look very good. The company’s balance sheet had £71.2m in net cash at the end of March and since then the company has cancelled its share premium account, which was an un-distributable reserve that held £38m at the end of March. With this account cancelled, the bulk of the cash can be returned to shareholders via its already impressive dividends or its growing share buyback programme.   

With a decent valuation, increasing shareholder returns and good growth prospects, Numis has definitely earned a place on my watch list.

Fuelling up for future growth 

Another stock that fits the bill is nearly-new car dealer Motorpoint (LSE: MOTR). The company currently offers a 3% dividend yield while its shares are priced at only 8.2 times forward earnings. Furthermore, analysts are forecasting a 4.1% dividend yield for the year ahead as the company’s expansion continues and fuels increased earnings and dividends.

They look to be right as the company’s half-year trading update released this morning detailed an 18% uptick in sales from new and existing locations as well as an increase in underlying pre-tax profits from £6.4m to £10.5m y/y. This solid performance suggests the market for Motorpoint’s cars, which are under two years old and have less than 15,000 miles on them, remains robust, even as economic indicators such as consumer confidence have taken a dip recently.

Of course, investing in a used car dealer entails risks related to the macroeconomic environment, but with no debt, good potential for opening new sites and an evidently healthy market for its products, Motorpoint could be an option for more risk-hungry income and growth investors.

The post 2 bargain basement dividend kings appeared first on The Twelfth Magpie.

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• 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?

Ian Pierce 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.

But these early gains soon stalled, perhaps because pre-tax profit fell by 30.7% to £11.7m last year. This pushed adjusted earnings down by 13.6% to 12.7p per share. One bright spot for shareholders was that a final dividend of 2.9p per share means the full-year payout has risen to 4.23p per share, giving a yield of 2.8%.

Why have profits fallen?

These figures seem to suggest that profit margins collapsed last year. That’s not entirely true. Despite a slow period following the EU referendum last year, Motorpoint’s gross profit margin on each car sold was almost unchanged, at about 7.6%.

Profits fell because of costs relating to site openings, and rising administrative costs. The value of the firm’s inventory of used cars rose by £23.5m to £98.4m last year, as it increased stock levels to support a higher number of sites.

That seems reasonable enough, but I’m concerned about the increase in overheads. Administrative costs rose by 50% last year, from £24m to £32m. Does an increase from 10 to 12 sites really require such a hefty increase in overheads? I’m not convinced.

While trading appears to remain strong, my view is that Motorpoint may not be very well positioned to deal with a slowdown. The group has increased stock levels, opened new branches and scaled up its central overheads. A slowdown could cause profits to collapse. It currently trades on 12 times trailing earnings with a yield of 2.8%. I wouldn’t chase this one any higher.

Is the market turning on this stock?

FTSE 100 newcomer ConvaTec Group (LSE: CTEC) makes medical supplies such as colostomy bags. Sales rose by 2.3% to $1,688m last year, which is the kind of pedestrian growth I’d expect from a business like this.

However, recent acquisitions and restructuring appear to be driving a big improvement in profit margins. ConvaTec’s adjusted operating margin rose from 26.5% to 28% last year. Adjusted earnings per share rose by 30% to $0.13 in 2016, and are expected to rise by a whopping 46% to $0.19 per share in 2017.

Given all of this, you may think that the shares deserve their lofty forecast P/E rating of 22. That may be so, but I’m concerned that investors face several risks that could limit further gains.

My first concern is that net debt is high, at $1,722.9m. ConvaTec’s ratio of net debt to adjusted EBITDA was three times at the end of 2017, well above my preferred limit of two times. Interest costs are also high — the group spent $270.6m on cash interest payments in 2016. That’s equivalent to more than half its adjusted operating profit of $472m.

It’s also worth noting that this rapid earnings growth isn’t expected to continue. Analysts have pencilled-in forecast earnings per share growth of 9.9% for 2018, leaving the stock on a 2018 P/E of 20.

The shares have already fallen by nearly 10% from their peak of 349p. In my view, further falls are likely as the stock’s valuation adjusts to reflect ConvaTec’s high debt levels and likely slower future growth.

The post These high-flying growth stocks could be hazardous to your wealth appeared first on The Twelfth Magpie.

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Roland Head has no position in any 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.

Investors sent Motorpoint 3% higher from the midweek close and to levels not seen since last October.

The auto supermarket advised that turnover for the period to March 2017 is expected in at £820m, up 12.5% year-on-year. And as a result Motorpoint expects profits to register “at the upper end of the range of current market expectations, reflecting the improving trading performance in the second half.”

Broker consensus has put profits for fiscal 2017 at between £14.6m and £15.5m, Motorpoint noted.

While broad retail conditions in the UK have deteriorated since the turn of 2017 amid rising inflation and increasing fears of economic trouble, Motorpoint has endured no such hardship.

Rather, the car seller noted that “the final quarter… has seen increased customer footfall and online traffic, driving improved volume performance both in like-for-like sales and sales at new sites.”

A bumpy road ahead?

But whether or not Motorpoint can keep up the pace in the months and years ahead remains a bone of huge contention.

Indeed, the retailer itself advised that “there remains some macroeconomic uncertainty in the UK economy, with the EU referendum result prompting ongoing customer caution, and a more subdued new car market anticipated following last year’s record performance.”

City brokers do not expect Motorpoint’s bottom line to crash any time soon however, and have chalked-in earnings growth of 28% and 13% during fiscal 2018 and 2019 respectively.

But I reckon these numbers are at variance with signs of growing stress in the used car market. As UBS data recently showed, while average retail prices on online portal Motors.co.uk grew steadily through the last calendar year, values fell 4% in January and rose just 1% in February.

While some would argue that a forward P/E ratio of 9.4 times bakes in the risks facing Motorpoint, I am not so convinced and believe the firm’s heady forecasts could be subject to painful downgrades as the year progresses.

Copper clanger

Looking further afield, I also believe copper producer Antofagasta (LSE: ANTO) is a poor growth prospect as oversupply threatens to put the clamps on metal prices.

The number crunchers expect the Chilean miner to punch earnings expansion of 38% this year and 14% in 2018. However, I reckon Antofagasta is still an unappealing pick, irrespective of these forecasts, and particularly as these projections leave the digger dealing on a high forward P/E rating of 22.6 times.

Latest trade data from China amplified concerns that underlying demand for the red metal remains weak, with total imports of 340,000 tonnes in February reflecting a 10.5% month-on-month drop.

And while strike action in Peru has helped support copper prices more recently, a flurry of mine expansions across the globe threatens to keep the market swimming in excess metal in the years ahead, a worrying sign for future prices of the bellwether commodity.

The post 2 growth stocks I wouldn’t touch with a bargepole appeared first on The Twelfth Magpie.

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Royston Wild has no position in any 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.