This stock looked expensive when we tipped it but it has gone on to gain 15pc

Just as in life, stock market investors usually get what they pay for.

Good businesses often trade at premium valuations relative to their rivals because they offer a lower risk of permanent capital loss and the potential for higher long-term profit growth.

The ability to judge whether a specific high-quality business is worth buying at an elevated price is, of course, more of an art than a science. Paying too much for even the very best businesses can mean that their returns disappoint because the market has already factored in their upbeat prospects.

Encouragingly, our recommendation to buy the FTSE 250 food producer Cranswick in July last year has proved to be worthwhile in spite of its relatively rich valuation.

Although we felt that a price-to-earnings ratio of 15.8 represented good value for money at the time thanks to the high quality of the business, it nevertheless appeared a generous price to pay given that the index of medium-sized companies had slumped by 22pc in the preceding 10 months.

Since our tip Cranswick’s share price has risen by 15pc. This represents a 20 percentage point outperformance of the FTSE 250 index.

The company’s shares now trade on a price-to-earnings ratio of 16.8, which is even richer on a relative basis than it was in July last year in view of the index’s continued decline.

But given its solid financial position, clear competitive advantage and excellent growth potential, the company remains a highly attractive investment on a long-term view.

Its recently released first-quarter trading update showed that sales rose by nearly 15pc relative to the comparable period the previous year, with growth achieved across all four of the company’s food product categories.

As a result, it expects financial performance for the full year to be ahead of its previous guidance. The company was able to counter the effects of high inflation on its financial performance via price rises and cost control, including the increasing use of automation across its operations.

This helps to further strengthen its competitive position; a return on equity of 14pc in its most recent full year evidences its clear competitive advantage over rivals in the sector.

Separately, Cranswick’s growing farming capability provides a degree of self-sufficiency that helped it to overcome a 28pc year-on-year rise in the average pig price during the first quarter of its financial year.

It has also been able to increase market share in its core pork business and conduct significant capital expenditure, which has amounted to £250m over the past three years, to further strengthen its long-term growth prospects.

The dividend, meanwhile, was raised by 5pc in the most recent financial year. This is the 33rd consecutive year in which it has been increased.

Higher spending and rising shareholder payouts have not prompted financial instability, though: net gearing stands at just 2pc and net interest costs were covered 22 times by operating profits last year.

This provides the company with the capacity to make further acquisitions to gain market share and strengthen its competitive position. With scope to expand in areas such as poultry and pet foods, Cranswick’s growth prospects remain highly appealing.

When combined with its competitive advantage and solid financial position, it remains a high‑quality company that is worthy of a premium valuation. Certainly, its shares are even more expensive now than they were at the time of our original recommendation.

But they continue to offer good value for money on a long‑term view. Keep buying.

Questor says: buy 

Ticker: CWK 

Share price at close: £35.28

Update: MaxCyte

Having risen by as much as 220pc since our tip in October 2020, shares in MaxCyte have subsequently slumped.

They are now 34pc lower in a roller-coaster ride for investors. The company, whose machines enable pharmaceutical firms to make gene editing treatments, recently released disappointing results for the third quarter of its current financial year.

Sales declined by 26pc versus the same period of the previous year as a tough operating environment weighed on performance.

For the full year, revenue is now expected to fall by 21pc relative to the previous year.

On a long-term view, MaxCyte continues to have growth potential. Clearly, though, it is a relatively risky and highly volatile stock to own. We advise readers to tough it out. Hold.

Questor says: hold

Ticker: MXCT

Share price at close: 245p

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