Robert Stephens, CFA, discusses the prospects of three FTSE 100 shares that have made strong gains over the past few months.
It is tempting to sell FTSE 100 shares that have made gains since the index’s lowest point on 23 March.
The world economy faces a period of great uncertainty. Higher unemployment levels and weaker consumer confidence figures have already been recorded. Therefore, taking a profit on some holdings could be viewed as an efficient use of capital by some investors.
However, the long-term prospects for many stocks still seem to be sound. Therefore, even though they have made gains over the past few months, buying these three companies could still represent an efficient use of your capital over the long run, in my view.
Gold miner Polymetal (LON:POLY) has soared 31% higher year-to-date as a rising gold price has improved its financial prospects. The company’s first quarter production update stated that it is on track to meet guidance for the full year, having raised production by 5% in the first three months of the year.
As with almost all companies, Polymetal faces the threat of operational disruption from a rise in Covid-19 cases. However, its price-earnings ratio of 16.7 and forecast EPS growth rate of over 40% in 2020 indicate that it offers good value for money.
The gold price could move higher after its 23% rise over the past year. A low interest rate environment that may be in existence for the long term coupled with risks to the economy’s growth prospects could make it an attractive asset to hold due to its store of value. Polymetal’s dependence on the gold price may therefore help to further lift its share price.
Housebuilder Persimmon’s (LON:PSN) shares have gained 48% since their March low. The reopening of the construction industry and the company’s sales offices has been greeted with improving sentiment from investors.
However, rising unemployment and weak consumer confidence suggest that buying a new home may not be a priority for large numbers of people in the short run. This may lead to disappointing financial performances across the sector over the remainder of the year.
Still, low interest rates may make housing more affordable for many people. Government support schemes such as Help to Buy may also be kept open for longer than previously intended to strengthen the sector.
Under a new CEO, Persimmon is likely to continue its quest to improve build quality and service levels. This may require upfront investment but could generate higher returns over the long term.
Pub and restaurant closures have hurt Diageo’s (LON:DGE) financial performance in 2020. The alcoholic beverages business’s share price has failed to keep pace with many of its fellow global consumer goods companies over the past few months, as vast swathes of demand for its products have disappeared.
The gradual ending of containment measures has helped to improve investor sentiment towards the stock. Diageo’s share price has gained 23% in the past three months, and further growth could be ahead as the travel and leisure sectors return to normal.
It could be a slow path to growth for the business. Its short-term prospects depend on how quickly lockdown ends across multiple geographies, which is impossible to predict. However, the company’s valuable range of brands and cost reduction measures put in place could lead to further share price growth over the long run.