As talk of interest rates staying lower for longer begins to sink in, investors are increasingly realising the stock market is the only feasible alternative to savings accounts and term deposits, which currently offer lacklustre returns.
Of course, another option is the property market but with so much talk about a potential house price bubble, it’s no wonder why so many would-be investors are steering clear of borrowing funds to buy a possibly expensive and time-consuming investment.
However, stock market investors need also to be careful they too don’t overpay for assets. Thanks to the S&P/ASX20 (INDEXASX: XTL) and S&P/ASX 200 (INDEXASX: XJO) indices climbing to their highest levels in almost six years, the possibility of buying into potentially overvalued stocks is growing every day.
For example, one stock which investors may want to avoid is Woolworths Limited (ASX: WOW). The supermarket heavyweight has performed exceptionally well over the last decade as its store count increased and its superior supply chain network allowed it to increase market share and muscle out smaller competitors such as IGA and Foodworks.
Woolworths’ push into the highly-fragmented hardware market was and is logical, so too will be its move into finance and banking services. However at over $36 per share, Woolies’ stock is slightly overvalued and does not present as a buying opportunity, in my opinion. Given its growth prospects I believe a fair price to pay would be between $29.00 and $31.00 per share.
However that doesn’t mean it’s a ‘Sell’ either. Being a company with significant competitive advantages and a healthy dividend yield, it’s the perfect type of company to hold through a market cycle.
From one extreme to the other, Liquefied Natural Gas Limited (ASX: LNG) (“LNGL”) has so far been the ‘story stock’ of 2014 and its gains have been based mostly on speculation. Its share price is up 1,300% since January 2 2014.
LNGL is the owner of Magnolia LNG, a US subsidiary which hopes to construct a liquefied natural gas liquefaction export facility in Lake Charles, Louisiana, USA. Recently the company decided to nearly double its production potential by purchasing Bear Head LNG Corporation from Anadarko Petroleum for $US11 million.
Unlike Magnolia – which is a proposed 8 million tonnes per annum (mtpa) tolling facility with four LNG trains, Bear Head is expected to become a 4mtpa export facility with room for expansion. Bear Head is consistent with LNGL’s growth strategy and is expected to utilise the company’s patented OSMR technology to reduce capex and opex.
As a proud owner of LNGL shares from an early stage (it’s been a “twelve-bagger” for me already), I’ve become concerned its share price may have gotten ahead of itself and I would want to see more progress from Magnolia before committing to a purchase, at today’s prices.
Lastly, Macquarie Group Ltd (ASX: MQG) shareholders will be ecstatic with the performance of our largest investment bank over the past two years – up 137% not including dividends.
Investment banks, fund managers and diversified financials are largely cyclical businesses and have welcomed rising equity markets and low interest rates. This has allowed them to boost assets under management and appear exceptionally well-run businesses.
And Macquarie is exactly that: An exceptional company with global exposure.
Promisingly, the bank has a keen focus on Asia, where it has made a number of strategic acquisitions to grow its exposure to the rising middle-class population and an unprecedented amount of economic activity.
However, purchasing Macquarie (or any fund manager for that matter!) in current bull market conditions could prove to be akin to buying iron ore stocks two years ago. Whilst I think Macquarie is, along with ANZ, one of the best ultra-long-term banking companies on the ASX, I’m setting aside some money to buy it when the market tanks.
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