Although investors should never rely too heavily upon a company’s past share performance, it can still be used as an indicator of the stock’s volatility or consistency of returns.
For instance, a stock’s performance over the last five years could have been up and down like a rollercoaster, indicating heavy volatility. On the other hand, it could have risen smoothly in value over the period of time which could be a good indicator of a strong business with steadily growing profits and prospects.
Another factor that must be considered is whether that stock’s true potential has already been realised by the market. That is, whether it has perhaps become overpriced or if it still stands a chance at delivering market-beating returns.
Below are three companies which have risen by more than 50% annually over the last five years. While they each represent solid businesses, are they still worthy of investors’ money?
M2 Group Ltd (ASX: MTU): After trading at around 50c in March 2009, shares are now priced at $6.25 which reflects an average annual return of 75%, not including dividends. The company now boasts a market capitalisation of $1.12 billion and is trading on a P/E ratio of 14.3.
Although it may be a little optimistic for investors to assume annual returns of 75% will continue from this point onwards, the company still holds enormous growth potential. While it is up against tough competition (look no further than Telstra Corporation Ltd (ASX: TLS)), it has acquired a number of strong businesses including Dodo and iPrimus and looks set to continue growing at impressive rates.
Domino’s Pizza Enterprises Ltd (ASX: DMP): Following a particularly strong performance in 2013, the company appears to be going from strength to strength. Its five-year average annual return is an outstanding 53% and sales are improving in the Australian and Japanese markets. What’s more, online sales are picking up in pace as the company strives to transform its traditional pizza business into “an online digital business that sells pizza.”
Trading on a P/E ratio of 41.5, it is not a cheap buy but could certainly still have room to run as new stores are rolled out around the globe while the company will also focus on improving sales in Europe.
Village Roadshow Limited (ASX: VRL): The entertainment and media company has delivered investors with an average annual return of 69% over the last five years – an outstanding performance by anyone’s standards.
While the company already operated theme parks in Queensland and the United States, it recently opened the new Wet ‘n’ Wild Sydney in December. Meanwhile, it is focused on releasing between 6-8 movies per year. It was involved with the production of Baz Luhrmann’s The Great Gatsby which starred Leonardo DiCaprio, while it will also be involved in The Lego Movie, starring Will Ferrell.
Although it has already experienced enormous gains, I believe there are still more to be realised. Its 4% dividend yield is the icing on the cake.