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It’s plausible for penny stocks and small companies to see large share price moves in the course of just a few months. But when this happens to a billion-pound market cap stock, it’s usually for a big reason. So when I got alerted to a FTSE 250 company where the share price is up 112% in just six months, I decided to do more research.
Reasons for the surge
The company I’m talking about is Goodwin (LSE:GDWN). It’s a specialised mechanical and refractory engineering group. What this means is it makes everything from valves to castings for a variety of sectors like defence, mining and power.
The move higher really took off with the release of financial results back in July. They showed sales of £219.7m, a trading profit of £35.5m and profit before tax of £34.26m. These were all record-level metrics for the group. As a result, it provided a key catalyst for the rally.
As part of this, income investors also took note due to the board proposing a material dividend increase to 280p per share (up 111% versus the prior year). This was part of the updated dividend policy, noting “the board is confident that the alteration of the dividend policy from 38% to 58% of post-tax profits plus depreciation and amortisation is a safe and viable change for now and the foreseeable future.”
Another key factor came last month, with news of a major partnership agreement with US defence group Northrop Grumman. The expected value of the deal runs into the hundreds of millions of pounds, which is significant when you consider the total revenue for the business was just over £200m last year.
The direction from here
Investors have been quick to buy the stock, pushing it to all-time highs. From my perspective, it can keep going, but risks are growing.
The jump was earnings-driven and not down to pure speculation. This means the share price is less likely to crash completely, given solid data backing it. If Goodwin sustains revenue growth and announces further deals going forward, I expect more investors will pile into the stock.
However, the share price has surged more than its growth in earnings per share. Evidence of this can be seen from the price-to-earnings ratio, which now sits at 42. This is well over double the FTSE 250 index average and could indicate the company is overvalued.
Aside from this, a company-specific risk is that over 50% of the business is held by the founding family or related large shareholders. Some might see this as a bit concerning, given the influence they could have over the business.
When I bring it all together, the doubling in price for the stock does make sense. From here, I feel it can keep going, but would only considering investing a small amount given the concern about valuation. Investors can consider doing the same if they’re comfortable with the risks.
