Stocks priced to perfection leave little room for error during market corrections. The market is quick to cut down companies on excessive price/earnings multiples at a hint of disappointing news on the horizon. Companies with strong underlying businesses aren’t exempt from having their price premiums rapidly stripped. But top stocks do justify a premium to a point. But as James Samson, of Lincoln Indicators, says that doesn’t mean investors should pay any price to get their hands on them. “Premiums vary in justification, and as businesses quickly become market darlings and post significant share price gains, the risk of a fall can build,” Samson says. “Whether you implement a growth or value stock picking strategy, investors should consider industry peers, use a watch list and ensure the premium isn’t unreasonable. Then be opportunistic. In this market, volatility creates plenty of opportunities for the patient investor.” Samson and Bell Potter Securities private client adviser Charles Thomas examine six stocks they believe can be part of any balanced portfolio at the right price. The companies widely appeal as they are proven performers with strong businesses. Carsales.com (CRZ)
Chart: Share price over the year to versus ASX200 (XJO) Samson says share price gains of this digital vehicle classifieds business have far surpassed the broader market in recent years. “There’s no doubt the low cost online model is a huge advantage and, as an industry leader, it should be afforded a price reflective of that quality,” he says. “However, when the market looked weak and mining money sought a new home, CRZ hit dizzying heights, trading on a forward price/earnings ratio of 31 times. After a reality check, the business once again looks more attractive, but on current forward P/E multiples of 21 times on June 19, it’s still trading well above its peers and the broader market. Investors need to remind themselves that everything has a fair price, even quality.” iiNet (IIN)
Chart: Share price over the year to versus ASX200 (XJO) Samson says the share price rose on healthy expectations for the mid-cap telecommunications sector. Traditionally trading at a price/earnings discount to industry peers, iiNet is now commanding a healthy premium due to growth expectations. He says the share price fell by 20 per cent between May 15 and June 7 in response to the market over-estimating the value of earnings. iiNet is a quality business with a strong market position and increasingly attractive scale. “However, investors must be disciplined and pay a price they deem as representing value,” he says. Domino’s Pizza Enterprises (DMP)
Chart: Share price over the year to versus ASX200 (XJO) The share price has more than doubled since February 2010. “DMP is not only a leader in the food services market, but also in the use of digital services to enhance its base offering,” Samson says. “There’s no doubt in my view that the company is among the best on the ASX. However, on a forward price/earnings multiple above 20 times on June 19, investors might think twice.” REA Group (REA)
Chart: Share price over the year to versus ASX200 (XJO) A premier online advertiser of real estate classifieds in Australia, Samson says the stock has provided investors with an astounding 700 per cent plus return since 2008. The stock still appears to be priced at the top of its range. But, he says, with double-digit earnings per share growth expected in the next two years, REA undoubtedly commands a premium to its peers and the broader market. Samson says the share price fell about 20 per cent between May 15 and June 7. “We expect this stock to continue growing, so any retreat in price may signify an opportunity,” he says. Commonwealth Bank (CBA)
Chart: Share price over the year to versus ASX200 (XJO) Charles Thomas says Bell Potter has buy ratings on Commonwealth Bank and Challenger despite recent share price weakness. He says CBA’s share price retreated from $73.45 on April 30 to $65.12 on June 12. CBA reported 8.5 per cent higher unaudited cash net profit after tax to $1.9 billion in the third quarter of 2013, underpinned by strong performances in Australian banking. “While the bank continues to manage asset growth profitably without jeopardising net interest margins (higher in third quarter of 2013) and credit quality, we anticipate sufficient revenue momentum on the back of improving housing affordability and loan approvals,” Thomas says. The shares were trading at $68.38 on June 19. Challenger (CGF)
Chart: Share price over the year to versus ASX200 (XJO) The share price retreated from $4.20 on April 30 to $3.69 on June 12. On June 19, the shares were trading at $3.95. Thomas says: “Challenger is in a strong position to reformat its dividend payout ratio, with a growing life book, burgeoning funds management business and a range of new products gaining traction – both pending and launched. In addition, we believe dividend franking may arrive sooner than the current guidance of fiscal year 2015.” Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au. You should seek professional advice before making any investment decisions.