It might sound silly, but investors seeking solid returns are often scared off by strongly performing stocks.
That’s right, they take one look at a stock’s recent performance and determine the investment isn’t worthwhile. For instance, they might see that Challenger Ltd (ASX: CGF) is trading near an all-time high and therefore choose to invest their money elsewhere, completely disregarding the company’s enormous growth potential.
It’s an incredibly short-sighted mindset that can prove to be costly for those who fall into the trap of thinking a stock can only climb to a certain price before it will plunge. Although you must remain on the lookout as to whether a stock has become overpriced, you sometimes have to pay up for quality businesses.
Almond producer Select Harvests Limited (ASX: SHV) is a perfect example. The stock rose an astonishing 272% in 2013 and has delivered a further 30% gain since the beginning of the year. Many investors would see this and choose not to invest, assuming there is only downside risk from here.
They would be wrong in thinking that. While Select’s orchards are at a prime stage of growth, there is also upward pressure on the almond price due to the drought affecting supply from California. This will boost the company’s margins. Its most recent interim results reflected this strength with a 118% increase in net profit compared with the previous corresponding period, while strong gains are expected to continue in future periods.
Like Select Harvests, Village Roadshow Limited (ASX: VRL) has been a market-favourite. In fact, it has risen more than 700% in the last five years. Despite its gains there is still a lot to like about the entertainment and media company, as it focuses on releasing 6-8 movies per years (one of its more recent involvements was with Baz Luhrmann’s The Great Gasby starring Leonardo DiCaprio). What’s more, it recently opened the new Wet ‘n’ Wild Sydney theme park in December, which has already proven to be a success. While the new park might be cooling down customers, the stock is still looking as hot as ever at $7.25.
While shares in global packaging company Amcor Limited (ASX: AMC) have retreated slightly from their highs, the company has delivered incredible returns for shareholders over the last five or so years and will continue to thrive thanks to a falling Australian dollar and an improving global economic outlook. Shares are currently trading at a hot price of $10.16 and should not be overlooked.
Another company that is shaping up to be a home run for investors is debt collection group Collection House Limited (ASX: CLH). More and more companies are outsourcing their receivables management tasks to specialist companies like Collection House, who stand a greater chance at collecting their debts. Its strong management team has led it to impressive growth in recent years, including a 23% increase in NPAT in 2013. Currently trading at just $1.80 on a P/E ratio of 13, its shares look set to take off.
One of the hottest stocks on the market today is Coca-Cola Amatil Limited (ASX: CCL). Not because the company is firing on all cylinders, but actually for the opposite reason. The company’s performance in 2013 was poor, to say the least, thanks to pressures in supermarket sales and its struggling SPC Ardmona business – both of which I believe will be short-term issues. While shareholders have made incredible gains off the company over the last five years, the market has punished the stock for last year’s results making now a perfect time to buy.