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I am always extremely wary of FTSE 100 stocks that market insiders highly favour – ‘investment darling’ shares.
As a former market insider myself, I know this clubby hype can lead to extreme overvaluations in stocks. One does not automatically follow the other, but it often does.
A particular sort of firm that attracts this sort of attention in my experience is one that grows by buying other companies.
Halma (LSE: HLMA) is a group of nearly 50 firms that make safety products for the health and environmental sectors. Its model is to identify companies that deliver strong growth, high returns and positive impact in global niche markets.
To find out whether its share valuation has fallen victim to the investment darling curse, I ran some key numbers.
Is it overvalued?
The first part of my standard share price assessment is to compare a stock’s key valuation measures with its competitors.
On the price-to-earnings ratio, Halma currently trades at 39.9. This is top of the group of its peers, which average 29.7 – so it is very overvalued on this basis.
These firms comprise Renishaw at 21.2, Siemens at 21.4, Danaher at 37.2, and Oxford Instruments at 39.
Halma is also very overvalued on the price-to-book ratio at 6.2. This is again top of its peer group – by a very long way – which averages just 2.7.
And it is also very overvalued on its 5.3 price-to-sales ratio – and top of the group — against the 3.2 average of its competitors.
The second part of my assessment is to work out what all these mean in share price terms. This involves running a discounted cash flow (DCF) analysis, using other analysts’ figures and my own. These cash flow forecasts for the underlying business highlight where any firm’s stock price should be.
The DCF analysis for Halma shows its shares are 61% overvalued at their current price of £30.90.
Therefore, their ‘fair value’ is £19.19.
Good results
Analysts forecast that its earnings will increase by 8.9% a year to the end of fiscal year 2027/28. And this looks well-founded based on its fiscal year 2024/25 results released on 12 June.
These saw the 22nd consecutive year of profit growth – up 12% year on year to £411.2m.
Revenue jumped 11% to £2.248bn, while adjusted earnings before interest and taxation rose 15% to £486.3m.
My view
Just because Halma looks overvalued does not mean it is a bad business — quite the contrary, in my view. There is, though, a major risk in the shares as an investment proposition.
I have never – and will never – pay more than fair value for any stock I buy. In fact, most of the shares I have bought over many years are undervalued by at least 30%. And there are many such stocks available right now in the FTSE 100 and FTSE 250 indexes by my reckoning.
It may be that Halma’s business will eventually grow into its current share price, of course. I just do not want to gamble that it will.
