UK Markets open in 7 hrs

Can these 2019 FTSE 250 winners continue surging in 2020?

Alan Oscroft
Two colleagues working on new global financial strategy plan using tablet and laptop.

I’ve always followed a rule of not buying shares in companies with which I have some sort of emotional or personal attachment, because it can make it hard to see the downsides and form an objective opinion.

Sometimes that’s served me well, but in 2019 it contributed to my ignoring Greggs (LSE: GRG), whose shares have climbed by 83% over the year. I kept away because I get my lunch from the high street bakery most days of the week, and my view is perhaps biased.

Tasty

Greggs has managed to get its name well known during the year through some good PR (though, perhaps ironically, I think its famous vegan sausage rolls are horrible), and that must have helped attract investor attention. That, and the past few years of phenomenal earnings progress, which many a high-tech growth company can only hope to match.

If forecasts for 2019 come good, we’ll have seen a 97% EPS rise over five years, and the dividend will have grown by 130% — though that does include a 35p per share special dividend. The yield is low, however, at around 2%.

Greggs’ forecasts look very reliable to me, after the firm upped its profit guidance in November for the fourth time in the year.

The only downside I see is the valuation of the shares, which are on a P/E of 26.6. In my experience, every company going through a growth phase like this suffers a share price fall when that spell comes to an end. But I’ve no reason to think that will happen in 2020.

Soft

Talking of soaring growth stocks that don’t come from the usual technology sources, shares in furnishings retailer Dunelm Group (LSE: DNLM) have done even better this year than Greggs, with a rise of 110%. That has come mostly in December, though, as they were only up around 50% at the end of November.

It was all down to a 5 December update, when the company announced the successful transition of all of its customers to its new digital platform (so maybe there is a technology angle after all) without any impact on overall performance. Full-year guidance was lifted too, and the shares soared — and they’ve gained further after the election result.

In addition to share price gains, Dunelm has been lifting its dividend and its strong cash generation allowed for a special dividend of 32p per share.

My problem is I that I think there’s too much exuberance here, with Dunelm not coming close to Greggs’ earnings rises. By year-end at June 2020, forecasts suggest an EPS improvement of a very modest 11% in five years, and I think we’d need something better than that in 2020 to justify a forward P/E of 22.3.

Steep

My Fool colleague Roland Head spotted Dunelm’s potential early in the year, but at today’s price he “wouldn’t rush to buy” the shares. He believes Dunelm deserves a premium rating, and I agree — but I think today’s is a bit too premium.

I don’t expect any big crash in 2020, but I can’t foresee any significant rise either — and I think we might even see a modest price consolidation.

More reading

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

Motley Fool UK 2019