The stock market rally has now been going on for over six months now. This translates into a price rise across UK shares, making them more expensive than before., even with the sell-off seen this week.
So how should I as an investor decide which stocks to buy?
Interpreting valuations
One way is to consider those that are relatively undervalued in a general bull market. My preferred measure is the price-to-earnings (P/E) ratio, which provides a way to make a comparison against peers.
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Another way is to consider stocks in the context of their own performance. So if a company has a high valuation, going by its P/E but it is also delivering great results, perhaps the premium on it is justified.
Treatt posts robust results
I think it is this second argument that explains the current share price of ingredient supplier to consumer goods manufacturers Treatt (LSE: TET). It has more than doubled since last year, and is now a few pence below £10.70, dropping slightly from its recent all-time-highs. At this level, it has a high P/E of 66 times.
But its latest results are pretty good too. It released its half-year results for the six-months ending March 31 earlier on Tuesday. Here are some details:
- Its revenues were up 13.5% from the corresponding half-year of 2020.
- Its pre-tax profit was up by a huge 71.4%.
- Treatt’s dividend per share has been increased by 8.7%.
Further, its outlook is positive too. Specifically, two statements stood out for me:
- Its trading momentum is good and it sees growth opportunities across markets. Group CEO Daemmon Reeve added that there is optimism about the reopening of hospitality in the coming months.
- It expects full-year pre-tax profit to be £20m, which is more than analysts’ expectations of £18m.
Bullishness on the UK share
Analysts are bullish on its share price. I have numbers only from three analysts as compiled by the Financial Times, but that does give some guidance. These numbers suggest an average of a 13.5% increase is expected in the share price in the next 12 months.
I should stress that analysts’ estimates are subject to changes, so this is only one factor I keep in mind when buying a stock. Nevertheless, it is a useful one.
In this case though, I would think that more bullishness is possible after Treatt released its latest figures.
Uncertain environment
My only concern about the share is that the broader environment may not quite play out the way we anticipate. The FTSE 100 index has just fallen back below 7,000 after staying above the level for a few sessions.
I think that investors have not yet put the stock market crash and coronavirus crisis behind them entirely. Because of this, there is heightened sensitivity to any new developments. A big enough catalyst can push us back into market crash levels. And that is bad for all stocks.
My takeaway
That is a pessimist’s argument, however. I am positive on the markets and I like Treatt, making this UK share a buy for me.
