Why I just sold this rising FTSE 250 stock
Typically, I like to hold stocks with three time periods in mind. There are FTSE 100 and FTSE 250 stocks I have bought with at least the next decade in mind. These are those in promising sectors, which are likely to show plenty of growth over time. Then there are cyclical stocks, that I buy with a three to five year timeline in mind. I am most likely to make gains from such stocks by buying them during downturns and selling them during booms. And there is also the odd speculative investment that gets sold as soon as the returns, often without warning, start looking good.
Why I bought Domino’s Pizza
My purchase of Domino’s Pizza (LSE: DOM) stock was an investment of the second kind, in a cyclical stock. This is because our spending as consumers is likely to be higher on eating out or takeaways when incomes are rising than when they are not. And we are now in a phase of recovery, after a long drawn out battle with coronavirus. So ideally, I should expect the FTSE 250 stock to keep rising.
What has changed
But something has changed in the past couple of years. The pandemic forced many of us into far more online shopping than we had done ever before. This resulted in, among other things, a boost to food delivery apps like Just Eat Takeaway and Deliveroo. They continue to report strong results even though the worst of the pandemic appears to be behind us. Domino’s is a standalone delivery provider, that in effect competes with these apps. I think it is fair to believe that the competition will only intensify over time. And with a vast array of delivery options available for consumers, I am not sure if the company can keep its edge.
Besides this, its share price trajectory has been unpredictable over the past five years, so I am not entirely convinced that it will continue to rise over the next few years as well. This is particularly because its price-to-earnings (P/E) ratio is at 21 times, which is not exactly low. And if there is a post-pandemic hit to its earnings as we start eating out more than ordering in takeaways, it is likely to look even higher at the current share price. In any case, its profits have not risen consistently in the past few years.
Potential upside to the FTSE 250 stock
It is possible that the trend could change, though. In mid-December 2021, it reported a new growth strategy in partnership with its franchisees. This will involve increased investment and opening of stores at a fast clip, among others. This resulted in a 19% increase in its share price in a single day. And it has remained relatively elevated since then. Clearly, investors are bullish on the stock now.
What I’d do
But as they say, the proof of the pudding (or the pizza, in this case) is in the eating. I would very much like to see results from its new strategies, instead of assuming that they will yield results. I have made a profit on my investment in the stock, but I will only be convinced to buy it again if I can see a clear path ahead for the FTSE 250 stock. Until then, I am focused on more promising picks.
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Manika Premsingh owns shares in Deliveroo. The Fintech Zoom UK has recommended Dominos Pizza. 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 Fintech Zoom we believe that considering a diverse range of insights makes us better investors.
Fintech Zoom UK 2022