It?s been a great 12 months for a2 Milk Company Ltd (Australia) (ASX: A2M) and Webjet Limited (ASX: WEB) with their share prices up 152% and 170% respectively.
But with any investment it?s the future that counts and the biggest question you should ask yourself (if you?re looking at buying shares of a company that has had a very strong run) is whether or not that trend can continue?
Strongly linked to a company?s share price over the long run is the actual performance of the business itself, but in the shorter-term, it?s quite possible for the share price to get ahead of itself…
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It’s been a great 12 months for a2 Milk Company Ltd (Australia) (ASX: A2M) and Webjet Limited (ASX: WEB) with their share prices up 152% and 170% respectively.
But with any investment it’s the future that counts and the biggest question you should ask yourself (if you’re looking at buying shares of a company that has had a very strong run) is whether or not that trend can continue?
Strongly linked to a company’s share price over the long run is the actual performance of the business itself, but in the shorter-term, it’s quite possible for the share price to get ahead of itself creating a short-term valuation ‘problem’ for potential investors looking at buying the stock.
I have some reservations about each of these companies due to business uncertainty on one hand and valuation concerns on the other.
a2 Milk Company Ltd (Australia)
The biggest concern I have with a2 Milk’s stock price in the shorter-term is the uncertainty that surrounds the company’s dispute with Lion Group (a major competitor to a2 Milk in this space) over the use of the term “Contains A2 protein”.
The promotion of the A2 protein is a major selling point for a2 Milk in that the milk itself contains only the A2 type of beta-casein protein rather than the A1 protein found in regular milk.
The major benefit for certain consumers who can’t drink regular milk is the fact they can drink a2 Milk’s products.
a2 Milk is suing Lion over its labelling promoting the presence of A2 protein in its products. Lion now is defending its position and is asking that the science behind the A2 labelling claims is tested in court.
I wouldn’t buy shares in this otherwise very good business until these legal matters are sorted out once and for all, and it’s possible that a2 Milk’s share price could be placed under some pressure until this uncertainty is removed.
Trading at close to $12 now, the stock now has a PE of almost 40 times earnings and pays a fully-franked dividend yield of 1.5%.
This seem quite expensive, but when compared to forecast earnings and dividend growth of 35%, it’s clear as to why the share price has been so strong.
In case you’re not aware, Webjet is an online travel agency and has since well-and-truly moved past just selling airline tickets.
With strong revenue growth, a healthy balance sheet and continued investment by management into its brands (Webjet, Zuji Asia, and Online Republic), the fundamentals of this business are strong. Whilst it would be a wonderful opportunity to see this company’s stock price fall, I don’t know if it will given how well Webjet is performing.
There will be an overall share market decline at some point in the future though, possibly dragging this high flyer down with it, but until then, I believe Webjet’s share price will continue to remain strong.
As a general rule, I wouldn’t chase performance and there are risks with both of these stocks.
There will always be opportunities for investments in the stock market and for this reason, I’d show patience and simply wait for value to appear.
As if you need to be reminded, the share market can be a brutal place for your capital if you’re hasty in buying shares before fully realising what you’ve bought and the cyclical nature of the markets means that the many ups and downs can sometimes be far greater in duration and magnitude than you previously thought.
If these two stocks are on your watch list, I’d keep them there for now.
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Motley Fool contributor Edward Vesely has no position in any stocks mentioned. The Motley Fool Australia owns shares of A2 Milk. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.