Kainos Group (LSE: KNOS) has struck me for a while as a top FTSE 250 share. It’s no hidden gem though. Its share rose by 50% in 2021. Although I think it’s a great company, the share price performance could slow this year, so I don’t expect it to shoot the lights out. A lot of the growth is already in the share price. Expectations and the valuation are very high.
Taking a P/E of 45 and multiplying it by earnings per share of 41.5 gives me a target price of 1,867.5p, which is not much above the current share price at the time of writing. I’d expect a number of other FTSE 250 shares could outperform that.
Worse yet, the prospect of continued high inflation means highly rated shares may come under fire from investors worried about the future value of cash flows, a common metric for assessing the attractiveness of investing in a share.
Even if Kainos continues to grow, which I suspect it will, a rotation to value and more reasonably priced investment opportunities, may hit the share price anyway.
I could be wrong though. Analyst expectations for the earnings could be too low and the shares could well go much higher than 1867.5p calculated, over the next 12 to 18 months. Kainos is profitable, dividend-paying and produces a high return on capital – all very positive attributes.
I just don’t think it’s the no-brainer share it was a few years back. 2022 could be much trickier and I anticipate a potential pull-back for the shares, so I’ll avoid adding them to my portfolio.
Another FTSE 250 share with potential
Continuing on a technology theme, DiscoverIE (LSE: DSCV) shares rose by 40% in 2021. I calculate a target price for DiscoverIE of 1,080p, using the same methodology as above. Again, that’s not much growth from today’s share price. That means much of the growth is either baked in, or analyst expectations for future growth need to be updated.
DiscoverIE designs, manufactures and supplies components for electronic applications. Its business model is solid and makes it profitable. The manufacturer also pays a dividend, which is a positive.
What’s lacking to make me buy though is a catalyst for further significant growth. I worry the shares may just be a little far ahead of themselves. When a company like DiscoverIE has a P/E ratio of 37, that worries me. All the more so with its history of inconsistent earnings growth.
There’s a chance both of these companies could exceed expectations and outperform. I’m aware both have done well historically, especially Kainos, and are good companies. I just don’t expect them to shoot the lights out like they have done in the past.
When it comes down to it, technology valuations in some cases are potentially stretched after a good run over the last two years. I’d much rather invest in undervalued shares like Legal & General and CMC Markets in 2022.
Andy Ross owns shares in Legal & General and CMC Markets. The Motley Fool UK has recommended Kainos. 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 Motley Fool we believe that considering a diverse range of insights makes us better investors.
