Hermes International shares are in fashion. But for how long?
Hermes International (RMS FP) is best known for luxury items such as silk ties and scarves, but the company’s stock price has also been turning heads, more than doubling over the past two years.
Is the ride over? Not according to the StarMine Price Momentum model, where Hermes places in the top one percent of all European stocks with a score of 100. High scores on this proprietary measure indicate positive price momentum and a strong likelihood of the stock price trending upward.
However, investors should proceed with caution, as the company’s valuation tells a different story. If we back out the market implied forward 10-year compound growth rate based on the current stock price, we see that the market has priced in growth expectations of 21.3%. In contrast, after adjusting for analyst bias the StarMine Intrinsic Valuation model arrives at a forward 10-year “Smart Growth” rate of 10%, far below the market implied growth rate.
At this modified growth rate, the stock would have a fair value of €100 versus €248 as of this writing, putting it in the most expensive 1% of European stocks by this measure. And the company’s relative valuation, plotted in the accompanying chart, reveals corroborating evidence. The company’s F12M P/E is 46 (green line), significantly above its 10-year median of 28.
So, investors face countervailing forces: momentum is the tendency of stocks to trend in the same direction; valuation tends to revert to the mean over time. Our research has found that looking at both market anomalies simultaneously is better than each in isolation.
To do this, we turn to the StarMine Valuation Momentum model, which combines relative and intrinsic valuation with price momentum and analyst revisions. For Hermes, the scale is tipped in favor of the reversion tendency of expensive stocks. This proprietary ranking assigns Hermes with a score of 23, placing the company in the bottom 25% relative to the other stocks in Europe.
In summation, while the momentum may continue in the short term for Hermes, longer term investors would be wise not to ignore the stock’s negative valuation signals.
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