Investors who buy stocks based on company fundamentals are often able to ignore whats going on in the wider market. But thats not always possible.
The two companies Im looking at today could equally be described as overvalued or as good value. Which of these descriptions you choose depends mostly on your view of the UK property market.
Both of these companies look like good businesses to me, but is now the time to buy?
A strong performer
Shares of land, property and construction group Henry Boot (LSE: BOOT) rose by 5% yesterday after the firm said 2017 profits should be comfortably ahead of market forecasts.
Theshares have risen by 50% so far this year, lifting the groups market cap to 394m. As youd expect, the stock is no longer obviously cheap.
Although Henry Boots forecast P/E ratio of 12.9 may seem modest, the firms price-to-book ratio has risen to 1.7, while the forecast dividend yield has fallen to 2.5%. These figures suggest to me that the stock is quite fully valued.
Although this valuation does seem to be supported by recent trading, my concern is that the pace of growth in this sector appears to be slowing. After rising by 24% last year, Henry Boots earnings per share are expected to rise by about 10% in 2017, and just 3% in 2018.
Although the market for new-build houses still seems strong, recent commentary from several commercial property companies has suggested that the tail end of the market may be approaching.
I wouldnt sell shares in Henry Boot just yet. But I would keep a close eye on the market.
Incredibly high returns
Many investors believe the ultimate test of a business is its return on capital employed (ROCE). This ratio measures a companys profits relative to the capital invested in the company.
By this standard, Mortgage Advice Bureau (LSE: MAB1) is one of the best companies youll find. This mortgage broker generated an incredible ROCE of 91.9% last year. To put this figure in context, an ROCE of more than about 15% is usually considered quite high.
The group is fairly large, with a network of about 900 advisers and a range of more than 12,000 mortgage products. Revenue has risen from 18.2m in 2011 to 92.8m in 2016. Earnings per share have risen at a compound average rate of about 50% per year over the same period.
However, these figures have to be seen in the context of the long-running housing boom weve seen in recent years.
Mortgage Advice Bureaus advantage is that its fixed costs are relatively low. Much of the pay earned by its advisers is on commission, so when mortgage sales rise, the groups profits rise quickly as well.
The downside of this situation is that if demand for mortgages does start to fall, Mortgage Advice Bureaus profits could also slide fast.
The groups stock currently trades on 19 times forecast earnings, and offers a covered dividend yield of 4.7%. If market conditions remain stable, then I think this valuation could be an attractive entry point.
For now, Id hold. But investors will need to watch carefully for any signs that sales growth is slowing.
This small-cap could be worth 38% more
Our investment experts have identified a UK small-cap which they believe could be trading 38% below its fair value. The company concerned has performed well in recent years and the shares looks decent value to me.
To help you decide, our analysts have produced an exclusive new report, 1 Top Small-Cap Stock From The Motley Fool. I believe this report is essential reading.
Best of all, it’s completely free and without obligation. To download your copy, just click here now.