The trend is your friend until the bend at the end is true enough, and it lies behind the idea of momentum investing you stick with a stock while its rising, and sell when it turns down.
Its clearly a nice idea, but you need to be able to get your timing right. If you cant (and heres a hint nobody can, consistently) you could be left sitting on some big losses if the price crashes, and soaring growth stocks can crash quickly.
Software
Thats a large part of the reason I wouldnt buy Aveva Group (LSE: AVV) shares now, after their remarkable 97% rise so far in 2019 (and I know theres only a day to go but I dont want to tempt fate, so Ill stick with so far).
The company develops software for engineering and industrial businesses, and we know how software companies can soar in value. Aveva has seen revenue and profits climbing over the past few years, and a lot of that revenue is recurring due to the way the company charges. Its also been expanding its new sales too, and is clearly doing very well.
So, Ive nothing against Aveva as a business its just the kind of great business that even Warren Buffett might like, if he went for high tech stocks. In fact, hes noted for suggesting you should strive to buy a wonderful company at a fair price. But thats my problem I just dont see todays Aveva price as a fair one.
As well as 2019s gains, Aveva shares are up 260% over five years, so I really wish Id bought some back then. But that rise has pushed them to a P/E multiple of nearly 44 based on expectations for the year ending March 2020, and with EPS predicted to grow by an unexciting 18%, dropping to 14% for the following year, I just think thats too expensive.
Safety
Something similar has happened to Halma (LSE: HLMA), whose share price has gained an only slightly less impressive 60% in 2019 and 213% in five years.
The company is also in a high-tech business, specialising in safety, medical, and environmental technology, and a number of worldwide developments are helping drive its business.
Halmas earnings have been growing steadily, though at a slower rate than Avevas in the past couple of years. But the share price has climbed ahead of that, pushing the P/E up from around 22 in 2015 to a forecast 37 for the current year (again to March 2020). While Halma is in another market thats likely to see strong demand over the long term, again I think the share price has got too far ahead of itself. So this is another I see as overvalued now and another Ill pass up on.
Buying Halma based just on momentum would have been successful in recent years, but the problem with a rising trend, as always, is knowing for how long it will rise. Been climbing for 12 months? Ive seen stocks crash after 13 months. Five years of steady gains? Ive seen them crash in year six.
Again, I think this is a potentially wonderful company, but again Im not seeing an attractive share price.
