(Review) These Stocks Have Hit 52-Week Highs: Should You Buy, Sell, or Hold?

CGI Group Inc. (TSX:GIB.A)(NYSE:GIB) and Valeant Pharmaceuticals Intl Inc. (TSX:VRX)(NYSE:VRX) have both hit 52-week highs. Here’s what to consider.

| More on:

When it comes to investing, it’s the best problem to have. Your stock has hit a 52-week high and you have a nice profit on this investment. At this point though, you may be re-evaluating the stock’s future given that it is trading at a high. Let’s consider two stocks that have recently hit 52-week highs: CGI Group Inc. (TSX:GIB.A)(NYSE:GIB) and Valeant Pharmaceuticals Intl Inc. (TSX:VRX)(NYSE:VRX).

Has the investment case deteriorated?

In CGI’s case, the investment case has not changed, and in fact, there is lower risk associated with it as the company has made significant margin improvements and is well positioned to continue to make improvements with the help of its size and breadth of offering. After the Logica acquisition, 2012 and 2013 earnings before interest and taxes (EBIT) margins were hurt. In 2013, the company’s EBIT margin was 10.6%, and it flirted with 8% at one point. In the latest quarter, margins were back up to 12.8% after the restructuring program that saw the company spend almost $600 million succeeded in achieving $375 million in annual synergies.

Valeant is definitely in the right business to benefit from one of the major secular trends going forward: the aging population. The investment case here has not changed either, and in fact, it is strengthened somewhat as leverage is down (although still high) and free cash flow generation has improved.

Future growth prospects

At CGI, the company’s strategy targets growing through contract renewals and extensions and winning new contracts, smaller niche acquisitions, and if and when the time is right, bigger transformational acquisitions. We are seeing this strategy play out in the company’s healthy backlog of $18.8 billion as of the end of the most recent quarter and in the continued success at being awarded contracts.

Growth prospects over at Valeant also look strong as organic growth is exceeding expectations, and the company continues to hunt for acquisitions that would give it a 20% internal rate of return over five to six years. However, growth prospects at Valeant largely depend on the company being able to find suitable acquisitions — and the financing of these acquisitions is also an issue. The company’s debt load is still high, and with a debt-to-equity ratio of almost 80%, this adds risk to the company.

Valuation

CGI’s stock is trading at 18 times trailing earnings per share (EPS), 16.5 times consensus fiscal 2015 EPS expectations, and 15.4 times consensus 2016 EPS expectations. And considering the amount of cash this company generates (a trailing 12 months free cash flow of $1.2 billion) and the flexibility and opportunity to deploy this cash to make acquisitions and continue to invest in organic growth, in my view, there is clear upside to the EPS numbers going forward.

Valeant is trading at 33 times 2013 EPS, 25 times 2014 consensus EPS, and 20 times 2015 consensus EPS. Although the growth that Valeant has achieved is nothing short of impressive, in my view, these valuations are high considering the fact that the company is so highly leveraged, and this presents itself as a risk.

Risk vs. reward

If the risk/reward relationship deteriorates to the point that the risk is too high relative to the potential reward, it’s a good idea to at least take some money off the table. This enables investors to monetize and lock in gains. Even if nothing has changed, it may still be good practice to take some money off the table when a stock has done exceptionally well.

As far as these two stocks are concerned, it looks like CGI is still in good shape, with a strong balance sheet, strong demand expected in its industry, and continued success in integrating its acquisitions. When it comes to Valeant, things are a little more risky, as the stock is trading at higher valuations and the company’s balance sheet could get it into trouble by reducing its ability to maintain its high growth rate.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Karen Thomas owns shares of CGI Group. CGI is a recommendation of Stock Advisor Canada.

More on Investing

Oil pumps against sunset
Investing

Oil or Tech? Why Choose When You Can Get Both in a Single Stock?

Tech stock Pason Systems (TSX:PSI) is exposed to the energy market boom.

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Investing

Protect Against Inflation With 2 Top TSX Stocks

Here are two top TSX stocks that long-term investors concerned about inflation may want to consider in this time of…

Read more »

Woman has an idea
Tech Stocks

The Smartest Stocks to Buy With $20 Right Now and Hold Forever

These under-$20 stocks have the potential to grow further with time and deliver solid capital gains.

Read more »

A close up image of Canadian $20 Dollar bills
Dividend Stocks

TFSA Investors: Put $45,000 in These Top TSX Stocks and Watch Your Passive Income Roll In

Are you looking to retire early? Here are a few ideas about how your TFSA could earn a passive-income stream…

Read more »

Human Hand Placing A Coin On Increasing Coin Stacks In Front Of House
Dividend Stocks

Love Passive Income? Here’s How to Make Plenty of it as a Real Estate Investor

You could definitely create passive income by investing in pure real estate, but you could make just as much, if…

Read more »

Make a choice, path to success, sign
Dividend Stocks

2 High-Yielding Dividend Stocks You Can Buy and Hold for Years

These two high-yielding dividend stocks can be the perfect addition to your portfolio, as the bear market causes payout yields…

Read more »

A worker uses a laptop inside a restaurant.
Tech Stocks

Why Investors Shouldn’t Give Up on Shopify Just Yet

Here's why long-term investors may not want to throw in the towel just yet on e-commerce juggernaut Shopify (TSX:SHOP).

Read more »

Retirees sip their morning coffee outside.
Dividend Stocks

TFSA Wealth: How to Turn $88,000 Into $1 Million for Retirement

Canadians can use the TFSA to hold a basket of diversified equity investments, allowing you to turn a $88,000 investment…

Read more »