Up 20% in a week! This growth stock is on fire – should I consider buying it?
I’m looking to add a growth stock to my self-invested personal pension (SIPP). This marks a change in strategy for me.
In recent years, I’ve focused on value shares, especially income-paying FTSE 100 financials like Legal & General Group. But I need a break from being a contrarian. Today, I want to piggyback on some momentum. Pick a red-hot growth share and, with luck, hope it climbs even higher.
Naturally, both strategies carry risks. Value stocks can turn out to be traps, while high-flying growth shares can come crashing down. I’m especially wary of buying after a stock has already surged, which is exactly the case with a FTSE 250 company that’s rocketed 20% in the last week.
This isn’t a flash in the pan though. Its shares are up more than 50% over 12 months and over 115% in five years.
Defence demand is surging
The stock in question is Chemring Group (LSE: CHG), and it has the benefit of operating in a sector that’s very much in demand right now: defence.
Chemring is a world leader in chemical and biological threat detection, electronic warfare and systems that locate improvised explosive devices. In today’s uncertain world, its kit is in demand.
It isn’t the only one riding this trend. FTSE 100 peer Babcock International jumped 13% last week. BAE Systems and Rolls-Royce have also wowed lately. Happily, I hold both.
Chemring got a major lift on Friday (6 June) when analysts at Berenberg upgraded the stock from Hold to Buy, citing a “very bright” outlook to 2030. It pointed to a pipeline of opportunities in Chemring’s energetics division.
Big order book
Berenberg noted that earnings per share are forecast to compound at 19% a year on average over the next three years. The broker called Chemring’s price/earnings-to-growth (PEG) ratio “undemanding”, and hiked its price target from 470p to 670p.
This came hot on the heels of a first-half update on Tuesday, when Chemring confirmed its annual guidance after reporting a 12% rise in underlying earnings to £39.8m. The order book hit a record £1.3bn, with intake up 42% to £488m.
Management noted rising global tensions, from Ukraine and the Middle East to the Asia-Pacific, with many governments increasing their defence budgets and rushing to replenish depleted stockpiles.
Timing matters
All this explains the recent rally, but even strong shares can run too far, too fast. There are five analyst forecasts for the stock, all with a 12-month target of 540p. That’s almost 7% below today’s price of 584p. However, all six analysts rating the stock currently label it a Strong Buy. None say Hold, none say Sell.
After quickfire surge, Chemring may slip back slightly as profit takers emerge, so I’d wait and watch before diving in. At a price-to-earnings ratio of 36, it’s hardly cheap. Personally, I already have plenty of exposure to defence through BAE and Rolls-Royce.
If I wasn’t already so heavily exposed to this dynamite sector, I’d seriously consider buying Chemring in the days ahead. There’s still a chance I might, if the heat goes out of it a little.
The post Up 20% in a week! This growth stock is on fire – should I consider buying it? appeared first on The Motley Fool UK.
But here’s another bargain investment that looks absurdly dirt-cheap:
Like buying £1 for 31p
This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!
Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.
What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?
More reading
- Despite hitting a near-14-year high, this FTSE 250 defence superstar still looks 32% under its ‘fair value’ to me!
- 2 cheap FTSE 250 growth shares I think demand attention in June!
Harvey Jones has positions in BAE Systems and Rolls-Royce Plc. The Motley Fool UK has recommended BAE Systems, Chemring Group Plc, and Rolls-Royce Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
