Beating the market average is the goal of nearly every sharemarket investor but it can be a difficult task to achieve.
An important point for investors to remember is that it is just as important to avoid over-priced and poor quality stocks as it is to buy high quality companies at reasonable prices. A poorly-performing stock can drag a whole portfolio down and these need to be avoided at all costs.
With that in mind, here are two popular stocks that have had a mixed 2015 so far:
ARB Corporation Limited (ASX: ARB)
ARB designs, manufactures and distributes accessories for 4WD and light commercial vehicles. Annual sales have now exceeded $300 million and its distribution network has expanded to over 80 countries.
The stock has performed extremely well over the past five years, returning 24% on average over each of the past five years.
The shares are now trading at over 23x FY15 earnings and although ARB has been a strong performer in the past, I believe the shares are currently over-valued. The reason for this is that profit growth has been slowing over the past three years compared to its historical growth rate.
Source: ARB Corporation Market Update May 2015
As the graph above shows, profit growth from 2012 and onwards has been subdued and management has confirmed that profit growth is likely to remain subdued for the short term as a number of factors impact on its margins. Some important factors that have negatively impacted margins include the strengthening of the US dollar that has been increasing the cost of purchases from abroad and higher interest expenses resulting from increased capital investments being funded through debt.
Although the company is in a strong financial position and the 4WD market is still robust, I would prefer to see sales growth return to historical levels before paying such a large premium for the stock.
ALS Ltd (ASX: ALQ)
ALS provides analytical testing services to the mineral, energy, pharmaceutical, food, environment and industrial sectors. It has 350 laboratories in 65 countries with annual revenues now exceeding $1.4 billion. ALS was once a market favourite but has since fallen out of favour as the decline in mining and energy activity around the world impacts on its operations.
ALS's most recent full year result showed that revenues increased by less than 3% and underlying net profit after tax actually declined by 17% from the previous year. The company also had to write down $290 million against the goodwill, plant and equipment of its oil and gas units.
The mineral and energy units make up about 45% of total revenues and the ongoing downturn in these sectors has made it difficult for ALS to improve its earnings position. As the chart below shows, although the life sciences and industrial sectors have been performing extremely well, the continuing decline in the price for a number of commodities means that demand for its testing services in the mining and energy sectors is likely to remain subdued for the short to medium term.
Source: ALS Ltd FY15 Results Presentation
With the shares trading at well above 15x FY15 earnings and management not providing any guidance for FY16, the shares are unlikely to outperform the broader market over the next year. Investors might be better served by leaving ALS on their watchlists for now and waiting for the cyclical upturn in the mining and energy sectors to take place first.
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