2016 is shaping up as a good year for investors in Tesco (LSE: TSCO), which is up 38% since January, Wolseley (LSE: WOS), up 27%, and 3i Group (LSE: III), which has surged by 42% since the beginning of the year.
Is it too late to buy these 2016 winners, or is there more to come during 2017?
Solid progress
Tescos share price momentum seems driven by operational progress. Chief executive Dave Lewiss turnaround plan is working, as Octobers interim results demonstrate. At constant exchange rates, sales for the half-year were up 1.3% compared to a year ago, operating profit ballooned by 34% and net debt was down a massive 49%.
Much of the profit improvement comes from squeezing out costs and Tesco plans even more of that. However, I reckon the biggest long-term battle concerns the fight for top-line growth.
Profit improvements cantcontinue forever unless revenues keep growing theres only so far a firms management can go with cost reduction. Tesco hopes to win customers back but competition is stiff and the likes of Aldi and Lidl areincreasing their share of Britains grocery market by double-digit increments.
Meanwhile, at todays share price of around 206p, Tesco trades on a forward price-to-earnings (P/E) ratio of 21 for the year to February 2018. Thats too rich, in my opinion, and seems to anticipate ongoing double-digit advances in profits for years to come. Id argue that the low-hanging fruit has already been gathered when it comes to profits. Going forward, operational progress looks like it will become harder to deliver, so Im cool on Tescos shares for 2017.
Cyclical to the core
In early December, plumbing, heating and construction products distributor Wolseley reported like-for-like sales up 1.8% for the firms first quarter of the year and profit up 1.4% compared to a year ago.
However, although trading in the US was good, the firm warned of a weak UK heating market and deteriorating Nordic construction markets. Thats important because Wolseley is one of the most cyclical shareslisted on the London stock market. If the macroeconomic outlook turns down, Wolseleys shares will plummet. Make no mistake about that.
Yet enthusiasm for the shares runs untethered and, at todays 4,936p, Wolseley trades on a forward P/E ratio of 17 for the year to July 2017. To me, thats more expensive as they should be at this point mid-macroeconomic cycle, so Im avoiding Wolseley for 2017.
Trading well and priced to buy
Of these three firms, I reckon 3i Group has the best chance of delivering for shareholders during 2017. The company invests in smaller firms and develops them, which leads to a rising net asset value.
At 688p, the shares trade around 25% above the 551p net asset value declared in November, and the forward dividend yield runs at 3.4%. The directors seem confident about the firms ongoing prospects and unfazed by current political turmoil and the macroeconomic outlook.
As a stock, I dont think 3iis troubled by overvaluation, which should help drive returns for investors in the years ahead.
Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.