This ASX 300 share is up more than 70% since making my 2023 buy list. Would I still invest?

Is it too late to buy shares in a company that has skyrocketed 76% in under four months.

| More on:
A person with a round-mouthed expression clutches a device screen and looks shocked and surprised.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

On 29 December 2022, I named what I believed were the best Australian companies to invest in for the year ahead. One share mentioned was S&P/ASX 300 Index (ASX: XKO) constituent Codan Limited (ASX: CDA).

Since then, shares in the supplier of communications and metal detection equipment have performed tremendously. As a matter of fact, Codan is the fourth best-performing ASX 300 share in 2023 — returning 76% so far this year, as shown in the chart below.

Created with Highcharts 11.4.3Codan PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.com.au

Why am I telling you this? Not to skite, demonstrate my crystal ball prowess, and stroke my ego. There is no intellectual gain from such practices. As the late John Kenneth Galbraith said, "There are two kinds of forecasters: those who don't know, and those who don't know they don't know."

No, instead of meaninglessly celebrating the short-term returns, let's put Codan up on the hoist again and reassess. Could it still be a worthwhile investment after sprinting to nearly $7 per share? Is the risk to reward still appealing? What is ultimately my five-year price target on this ASX 300 share?

Let's not waste any time.

Do I still think Codan shares can beat the market?

The Codan share price was heavily sold off in the second half of 2022 amid fears of falling metal detector demand and lower forward guidance.

As it turns out, metal detection revenue dropped 46.4% to $73. 8 million in the first half of FY23 compared to the prior corresponding period. Likewise, the company's net profit after tax (NPAT) slid 38.5% to $30.8 million.

However, the response by the market led to the lowest price-to-earnings (P/E) ratio that Codan has traded on since 2014. As shown below, the ASX 300 share could be purchased for under seven times earnings in December 2023.

Jumping back to the present, the momentum has shifted in 2023.

Whether investors are expecting stronger Minelab sales amid a resurgence in the gold price, or increased defence spending is being viewed as a positive for the communications segment, the market has been happy to bid Codan shares back up to a 15 times earnings multiple.

In my opinion, I think Codan remains a high-quality business with growth potential. The Minelab brand is incredibly strong with patented technology, while the communications segment provides a sticky revenue stream.

These facets combined, I remain confident the company can achieve a top-line 15% compound annual growth rate (CAGR) over the next five years. Ultimately, this places my five-year price target at $14.90 — 114% above the current price of this ASX 300 share.

Comms could crack this ASX 300 share

Codan, as with any opportunity, is not without its risks. In my view, the communications division poses the greatest threat to achieving benchmark outperformance in the medium to long term. Allow me to explain.

Unlike Minelab, it is difficult to tell how much of a competitive advantage Codan's various communication products hold. The segment as a whole is fairly opaque with regard to contract details, product specifications, and technology developments.

The company has purposefully pushed comms to be a bigger part of the business. Given its lack of transparency, this presents a risk of being blindsided.

Furthermore, the exposure to defence can be hit and miss. Take it from me, as a previous Electro Optic Systems Holdings Ltd (ASX: EOS) shareholder. If the pipeline begins to dry up, this segment can quickly turn into a money drainer, rather than a maker.

Final takeaway

At this stage, I still think Codan shares make for an appealing long-term hold. Though, I'm yet to take my own advice and buy into this ASX 300 share myself.

However, if the company's next update shows the company has performed resiliently in this difficult environment, I'd be inclined to pull the trigger around the current price. I believe there is a high level of longevity in this company that the broader market is discrediting.

Motley Fool contributor Mitchell Lawler has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Electro Optic Systems. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Opinions

Happy miner giving ok sign in front of a mine.
Opinions

Which ASX 200 stock offers 'material upside' amid continuing uncertainty over US tariffs?

Blackwattle Investment has identified one ASX 200 large-cap stock that is thriving on the uncertainty.

Read more »

A woman sits at her computer with her chin resting on her hand as she contemplates her next potential investment.
Financial Shares

2 rising ASX financial shares with 'meaningful upside' still left: fundie

Financials outperformed every other sector in FY25, but there are still buying opportunities left, say these experts.

Read more »

A businessman hugs his computer and smiles.
Opinions

If I could only own one ASX 200 share for the rest of my life, it'd be this one

This is one stock I expect to own forever.

Read more »

Man ponders a receipt as he looks at his laptop.
Technology Shares

Brokers rerate 3 leading ASX 200 tech stocks

Experts reveal their ratings on the ASX 200 tech sector's three biggest companies.

Read more »

Person holding a blue chip.
Opinions

Buy alert! 2 ASX 200 blue-chip shares worth a look now: expert

Dylan Evans from Catapult Wealth has identified two blue-chip shares that he thinks are good buys today.

Read more »

Two happy woman on a couch looking at a tablet.
Opinions

Why I'm excited to see the results of these ASX 200 shares

These stocks could reveal very interesting insights.

Read more »

Young male investor smiling looking at laptop as the share price of ASX ETF CRYP goes higher today
Opinions

Why I just bought this 5.2%-yielding ASX dividend stock and plan to buy even more

This business is one of my favourites for dividends and total returns.

Read more »

A young female investor with brown curly hair and wearing a yellow top and glasses sits at her desk using her calculator to work out how much her ASX dividend shares will pay this year
Opinions

Why I'm still investing in ASX shares during tariff uncertainty

There are a few reasons why I plan to continue investing even during uncertainty.

Read more »