Foolish investors know, no stock is a buy at any price. But is it worth paying up for a stock that has solid growth prospects even though they're not 'cheap'? Sometimes it is and if you don't, you could miss out on potentially massive gains because you didn't get the price you'd like.
There are a handful of businesses on the ASX who are likely to grow earnings substantially in coming years, but have one big problem: investors already know about them. Our jobs as savvy investors is to find the stocks which the market has either got the wrong impression of, or hasn't yet properly identified.
One of my favourite small-caps is Newsat (ASX: NWT) for a number of reasons, but mostly because of its huge growth potential and business model. It's a satellite communications company which was once a humble telecommunications provider.
It has a market capital of just $257 million (which represents a price-earnings of 90!), but the stock keeps climbing in anticipation of its first satellite launch later this year. It's easy to see why investors are buying up the stock. Its Jabiru-1 satellite is expected to generate in excess of US$3 billion of revenue over 15 years, at 85% margins from both government and private enterprise contracts. Newsat has the rights to seven orbital slots.
One stock with an even more impressive track record of shareholder returns is Greencross (ASX: GXL). It provides veterinary services to clients who want veterinary care, disease prevention and advice for their pets. At June 30 2013, the company had 97 veterinary practices and reported a profit increase of around 30% for the year. "The board expects EPS growth to exceed FY2013 in this financial year," Chairman Andrew Geddes said. It'll do that by growing the number of practices it has via acquisitive and organic growth. It currently trades on trailing PE of 48, but earnings are expected to grow strongly in coming years – it has a price-earnings-growth formula of 0.26.
Last but certainly not least is Collins Foods (ASX: CKF) – the owner of a number of KFC and Sizzler stores throughout Australia. It currently trades on modest earnings, but I believe with its recent acquisition of Competitive Foods (which include 44 KFC stores), and investment in up-and-coming casual food chain Snag Stand, its prospects look good. With ongoing organic growth and dividend yields to match, it's a finger licking good investment. I'll be looking at adding shares to my portfolio in the near future.
Foolish takeaway
Sometimes it's worth paying up for good companies because you may never get a chance to buy quality shares with the price-earnings ratios you'd like. I believe these stocks are likely to grow earnings and dividends in coming years, which justifies their high prices.
