Quality shares going sideways (BVXP, HL, JDH, FEVR, CRW, BOO)

I recently wrote about share prices ‘consolidating’ on my blog.

“Quite often a share price runs ahead of the company’s performance and then stagnates as the company catches up. Trouble is you never know when the consolidation period will start and when it will end. Investing for ten years undoubtedly involves watching prices tread water for long periods.”

2021 Q2 TFW sharepad share price

As well as FW Thorpe, another of my shares, Bioventix, seems to be in a consolidation phase. Its price is presently at a level first seen two years ago:

BVXP sharepad share price

A few other ‘quality’ names are in the same boat. Hargreaves Lansdown is almost back to a level first seen five years ago:

HL. sharepad share price

James Halstead is also almost back to a level seen five years ago:

JHD sharepad share price

Fever-Tree is at a level seen four years ago:

FEVR sharepad share price

Craneware is at a level seen three years ago:

CRW sharepad share price

And Boohoo is almost back to a level seen four years ago:

BOO sharepad share price

True, the pandemic will have affected these businesses to some degree (positively and negatively). But I suspect the sideways movements of these shares are not what holders have become accustomed to after some superb gains in the preceding years.

I plan to keep holding Bioventix, but wonder what the views are from anyone else holding the shares above. Happy to hold on and be patient? Frustrated watching other shares moving higher while yours go sideways? About to sell and reinvest into something that has more immediate upside?

The share prices may even reflect that possibility that the best days of these companies have been and gone. Not much worse in the market than holding onto a highly-rated quality name that loses its quality and premium rating.

Thoughts welcome.

Maynard

Shame no-one has commented on here since I was pondering BVXP. I suspect the answer is to sell and wait to see what the next results bring. My holding is stuck in an HL SIPP while it moves over to AJ Bell so I cannot do anything.

BOO has got a number of issues to deal with so I think that’s just the market trying to work out what to do rather than it going sideways due to lack of interest in the share.

HL has, I suspect gone ex-growth due to competitors eating its lunch. So sell and move on, unless the divi is worth having.

FEVR was a darling stock and I reckon “the herd” have just got bored and moved on. I don’t think it’s viewed as such a multibagger prospect. So I’d sell.

I don’t know anything about the others so cannot comment.

Best wishes
Steve

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Hi Maynard,

Interesting post - thank you. I think it’s largely a valuation thing to be honest. Here are the (rough) P/Es of these shares at the start of the “consolidation” phase you identify:

HL - 32x
BVXP - 27x
TFW - 29x
JHD - 29x
FEVR - 58x
CRW - 33x
BOO - 40x

That’s just very rough looking at the data on SharelockHolmes - so, it won’t be properly correct, but the basic point is, these shares were all very expensive at the start of the consolidation phase.

Quite a few of them are still very expensive now, too, which indicates another problem a number of them seem to have - slowing growth, whether actual or feared. It’s just very hard for a share that is very expensive and has slowing growth to do well over the medium term. The only way it can happen is if it keeps on getting more and more expensive. And if it does keep on getting more expensive, then future returns keep getting worse.

I think of myself as someone who invests in quality businesses (or tries to) and I think cheapness can be a trap. But as soon as you start buying businesses with P/Es materially greater than 20, the maths of actually earning good returns (other than speculatively) just gets quite unforgiving. Even for a high return on capital business, something that’s on a P/E of 30x has to grow consistently at over 7% a year to get you a 10% or greater return (I say over, because it’s rare for a business to sustain a 30x P/E indefinitely - it can only really happen if it’s growing very quickly).

So long as you keep in mind things like:

  • what’s the earnings (or FCF, or whatever) yield I’m getting when I buy?
  • how fast can this thing realistically grow at over the medium to long term?
  • am I likely to suffer multiple contraction?

then you’ll have a decent idea of what returns to expect.

It’s honestly still a problem for some of these companies. I looked at Craneware, for example - I like the business, but it’s hard to see how the risk / reward adds up.

I do hold BVXP, but I’m not sure I’d buy at today’s prices, and the prospects for the medium term don’t look anything like as good to me today as they did say five years ago. It’s a problem.

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I think there is a range of issues with these companies, to which you might add TSTL, Emis, JDG…

I used to hold Emis but, after 4 years sold out. The numbers were always solid but I noticed that the shares traded within a range. In truth, with effectively one customer, who is one day going to have to try to obtain value for money from GP practices, what future is there? It felt like a bond proxy with political risk, eg the “KPI reporting” incident a couple of years ago. TSTL is similarly afflicted by everyone focusing on the US licencing issue.

I suspect Boohoo and FEVR are afflicted by reopening uncertainty. Just what will any new normal, if it ever arrives, look like?

On the other hand, HL’s era might have ended, owing to competitive pressures.

I wish I knew what is going on at JDG, JDH and BVXP though.

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Hi Steve @LLG_Stephen, Philip @Philip_Hutchinson and Diogenes @Diogenes,

Many thanks for the replies.

True, but I think some of them were expensive beforehand, and kept going up for a while before the consolidation phase began! I suspect the price stagnation reflects a combination of market over-enthusiasm in earlier years and a gradual realisation that past growth rates are moderating (or will moderate).

Agreed on the maths with future returns – I believe it’s easier for a share to be re-rated from 8x to 12x (up 50%) than 30x to 45x (also up 50%). Re-ratings are what can really turbo-charge a share price.

De-ratings of course go the other way, and I just wonder now if certain valuations are no longer too exuberant. I have just written a piece for SharePad on ASOS, and arguably its 2023 P/E is not completely outrageous at 20x – and the forecasts do seem achievable. 20x compares to 100x-plus a few years ago. ASOS shares are presently at a level first seen in 2013.

With all this I keep thinking about Halma. During the early 2000s, I held Halma in a Motley Fool educational portfolio. For years the shares were stuck between 100p and 150p as earnings (green bars, right axis) stalled and the P/E was de-rated to 10-15x (black line, left axis).

HLMA sharepad daily pe eps

Eventually earnings took off again and so did the P/E and share price (now c50x and £27). I just wonder if some of today’s high-flyers could de-rate to 10-15x if enough issues emerge to keep a lid on earnings. I would venture the likes of HL etc should have the wherewithal to overcome most operational worries (aside from wholesale industry disruption).

On BVXP, this blog enquiry reminded me that the much-touted troponin test will only earn revenue until summer 2032. So this product ought to be valued on a NPV basis rather than through a simple multiple. The troponin expiry also makes me want to know more about the pollution-monitoring project, which seems to be the most likely of the pipeline efforts to become commercial.

Maynard

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The Halma situation intrigues me. I bought in around 2000 when I was way too busy to monitor things properly but I was drawn by its history of 30(?) years of steady EPS growth. Shortly after, there were a few blips in this story and the share price didn’t move in the right direction. I believe that the management pivoted to focus on safety technology, to become a serial acquirer and also to benefit from the irruption of China onto the world scene. Does anyone here know about what happened to change their share price profile? All I knew was the pleasant sequence of surprises when the 6 month portfolio valuations landed on the doormat

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