When a value stock becomes a momentum stock...

..good things can happen to the value of your investment. Today we had a half year report from Provident Financial (PFG) the home collected credit, on line loan, car finance and sub prime credit card provider which has a market capitalization of over £4bn and is therefore a member of the FTSE 250. The results today, as they have in recent periods, showed very strong growth with adjusted earnings up by 30% which was ahead of forecast growth of around 22% for the full year. The dividend was up by 15% which compares with full year forecast growth of nearer 19%, but I suspect they will make this up when they announce the finals.

All parts of the business seem to be delivering and are seeing good credit quality so they are therefore confident of delivering good quality growth for 2015 as a whole. However, as I wrote last time when the shares were over £30 they are starting to look more expensive these days on nearly 19x with a sub 4% yield. This compares to the 13 to 14x and 5%+ yield they were on in early 2014 when I first highlighted them and got into this one.

Thus as I said in the title of this piece when a value stock becomes a momentum stock good things can happen to the value of your investment - mine has nearly doubled here for example. Now some of that reflects the re-rating from 14 to 19x but also the fact that they have delivered better than expected growth as momentum in the business and management action have accelerated growth and shareholder returns. On the current rating, which is probably justified by the current strong growth forecasts of 10 to 20% for the next couple of years, they have become more of a growth / momentum play from here.

Summary & Conclusion
Another good set of results which help to support current growth forecasts, could lead to upgrades and also help to support the currently high rating the shares stand on. However, as a result of the the rating it is extremely unlikely the shares will double again in the next 18 months in the same way they have just done as a further re-rating seems unlikely to my mind.
Nevertheless the strong growth forecast averaging about 15% over the next couple of years together with the near 4% yield could still give total returns approaching 20% per annum, assuming they can at least maintain the current rating.

So a hold I would say if you are in them, but be aware that you are now relying on the growth and momentum continuing, as if it doesn't then you may run the risk of not getting the growth you expect and being hit with a de-rating which is always the risk with higher rated stocks which are expected to grow strongly. This is the  opposite to value / cheaper stocks which are generally expected to grow more slowly so if they disappoint the rating can take the strain more easily and if they surprise on the upside then good things can happen to the value of your investment as we have seen with Provident.