Why Johnson Matthey PLC Shares Could Be Finding Favour Again
Ben Hobson | Apr 09, 2019 09:38
There's an exclusive group of shares in the stock market that most investors would love to own. They've got stellar track records, sparkling reputations and the ability to deliver stunning returns over long periods - and Johnson Matthey (LON:JMAT) is a good example.
What makes stocks like Johnson Matthey so appealing is their strong exposure to the proven return drivers of high quality and momentum. It makes them capable of compounding market-beating returns over many years.
The catch is that they often come with expensive valuations - which means you have to pay up for the privilege of owning them.
You can think of these shares as being the stock market's High Flyers. So what are the common features of stocks like Johnson Matthey and where can you find more companies that have them?
High Flyers are high quality...
To start with, High Flyers are very distinctive. They are good quality, both in terms of their franchise and financial strength. This tends to show up in high profitability and strong industry leading margins. They’re stable, growing and often have accelerating sales and earnings. They also have strong and improving financial histories and no signs of accountancy or bankruptcy risk.
Johnson Matthey is a large cap stock in the Specialty Chemicals industry. One of its stand out quality metrics is its 5-year Return on Capital Employed, which is a solid 14.9%. Good, double-digit ROCEs are a pointer to companies that can grow very profitably.
h2 ...and they have powerful momentum.../h2High Flyers also have strong momentum both in the price of their shares and their track records of earnings growth. It shows up in stocks trading close to their 52 week high prices and outperforming the market. They’ll often be beating broker estimates and getting forecast upgrades and recommendation changes.
To an extent this is true at Johnson Matthey, where the share price has risen by 3.42% over the past five years - even though 2018 was a poor year for the stock. On a brighter note, the share price has been much stronger over the past three months, which could be a signal that the market is starting to warm to it.
h2 ... but they can be expensive/h2The drawback with high quality, strong momentum shares is that the market loves these traits. So stocks like Johnson Matthey rarely look cheap, and that can put many investors off. Only with hindsight could you say they were a bargain.
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Stockopedia's ValueRank scores stocks using a blend of the most important value ratios - from 0 (expensive) to 100 (cheap). On this basis, Johnson Matthey has a ValueRank of 36 - putting it squarely at the most expensive end of the market, even though its share price has been fairly flat over the past year.
Overall, the High Flyer approach is appealing because it targets the best quality, strongest momentum shares in the market. That combination of factors can zero-in on the type of company that’s capable of compounding investment returns over many, many years.
If you can catch them at slightly less expensive valuations - perhaps when the market is distracted - then all the better.
Disclaimer: These articles are provided for information purposes only. The content is not intended to be a personal recommendation. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser. The author has no position in the stocks mentioned, unless otherwise stated.
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