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In August, the best performers FTSE 250 Index The stocks were Group only (LSE:JST). After rising 21%, it is now up 95% in the past year. For a company with a market capitalisation of £1.48bn, that is an impressive feat! However, despite the jump, I think there is further room for further growth. Here is why.
The results help to drive a movement
To start, let's look at why it rose so much last month. One of the big influences was the first half results, which were published in the middle of the month. When the title of the report is “Constantly exceeding our goals”you know it's going to be a good read.
Sales grew by 30%, which trickled down to help operating profit rise 44% compared to the same period last year. The defined benefit pension sector of the business is really booming. Interestingly, the report noted that “In the last 18 months we have written more than a third… of all defined benefit transactions in the market, more than any other provider.” That's a very powerful comment and shows the position you've come to have in this space.
Future prospects are something that helped boost the stock further. The company expects to beat previous operating profit forecasts for the full year. But it doesn’t stop there, as Just Group expects the underlying drivers of growth to remain intact for the foreseeable future.
Why might I continue?
Even with the jump in August (and for much of last year), the price-to-earnings ratio is not high. It currently stands at 5.11. As a reference, I use 10 as a ratio for a reasonably valued company, so a ratio of 5 makes me think the stock is undervalued.
Given the earnings trajectory, I only expect the earnings per share portion of the ratio to grow over the next two years. If the share price does not rise, this would cause the ratio to fall further. Logically, I would expect the share price to rise, at least to keep the ratio at 5. If anything, I would expect the pace of share price growth to outpace earnings growth, to bring the ratio closer to 10.
In my opinion, this means that I still have time to buy and that I have not missed the opportunity.
Points to remember
Before I rush into buying shares, I must accept potential risks. One of them is regulatory change. In my opinion, the insurance industry is one of the (if not the most) strictly regulated areas in the UK. This means that any changes can have major implications for the future operations of Just Group.
Another factor I need to consider is the impact of interest rates. A large part of the pension investment portfolio is based on bonds. When interest rates fall, bond prices rise, but yields fall. This can make it difficult for the company to obtain a high interest rate on these investments.
Despite these concerns, I think the company is in a great position at the moment. I am considering adding it to my portfolio for the long term.
