It’s not hard to identify expensive looking stocks at present. A scan through the S&P/ASX 300 Index (Index: ^AXKO) (ASX: XKO) will quickly highlight companies such as REA Group Limited (ASX: REA) which is trading on a trailing price-to-earnings ratio of 49. While REA is definitely a high quality business and has good growth prospects, it’s hard to have a high level of confidence that buying at these levels will lead to a good outcome for an investor.
There are many other examples of companies whose share prices have been bid up beyond a conservative estimate of fair value. Luckily for bargain hunting investors, amongst the same Top 300 stocks there are also firms which have experienced double-digit falls in their share price which has increased the appeal of these stocks on a risk-reward basis.
Ausdrill Limited (ASX: ASL) is down nearly 19.5% this calendar year as resource sector drilling work has dried up. The company is a highly regarded operator and while the excess capacity in the industry means business will remain tough for some time, some brokers appear to think this is already baked into the share price with Hartley’s and Deutsche Bank reportedly both having ‘buy’ recommendations on the stock.
Seven West Media Ltd (ASX: SWM) like a number of its ‘old media’ peers is struggling to adapt to the competitive threats from ‘new media’. The stock is down 18% this year. While Seven did recently deny any current discussions with Fairfax Media Limited (ASX: FXJ), one wonders how long the sector can continue without further consolidation.
Myer Holdings Ltd (ASX: MYR) has seen its share price drop 17.5% over the first three months of 2014. The department store owner’s interim results failed to inspire investors, however it is arguably more a case of bumping along the bottom than getting any worse for Myer from this point.
iSelect Ltd (ASX: ISU) is probably one of the worst performing ‘new media’ stocks at present. The stock is down around 18% this calendar year and over 24% since its initial public offering in June 2013. While iSelect’s business model is significantly inferior to the likes of SEEK Limited (ASX: SEK), the business did generate a profit of $3.7 million for the half with expectations that it can lift its full year profit too.
While timing the market is always difficult, patience is certainly a virtue when it comes to investing. The above stocks could continue to get cheaper, or they could languish at these levels for some time. For this reason it can be safer for investors to try and identify catalysts which could lead to a re-rating before investing.
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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.
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