The three stocks in today's article look expensive by conventional measures, but rapid growth has convinced at least some investors to try their luck – shares continue to soar.
Of course the more you pay, the greater the downside risk, but as The Motley Fool's Share Advisor analysts have noted many times – you can only lose 100% of your investment, but running your winners can net you many times that figure.
So should you buy, sell, or hold these three high-flying stocks?
Blackmores Limited (ASX: BKL) – trades on a P/E of 45, up 143% in the past year
Blackmores has come more or less out of nowhere in recent months, surprising the market and Foolish contributors alike. First half 2015 profit was 53% higher than in 2014, and strong third quarter results look likely to deliver an even better second half.
Management was buoyant and expects rapid growth to continue, especially in China where Blackmores has even experienced shortages of certain products in recent months.
It's tough to evaluate Blackmores' prospects, but the market in China is huge and continued growth could easily see profits soar over the next few years. On the other hand as Chinese debt soars and the government increasingly struggles to lift consumer spending and reach its growth targets, there is risk of economic stagnation and rising unemployment, which would (maybe) put a lid on demand for vitamin supplements.
Given a history of going nowhere slowly, the unknowns and relative newness of this sales boom, I would call Blackmores a hold at present.
(Contributor Matt Brazier finds an attractive alternative to BKL shares in his article here)
Estia Health Ltd. (ASX: EHE) – trades on estimated P/E of 30, up 21% in the past year
A new Initial Public Offering (IPO) offering care services to the elderly, Estia health has risen in recent months on acquisitions and a positive half-year report that indicated the company was likely to meet its IPO forecasts later this year.
Strong occupancy and an ageing population offer good tailwinds, but Estia shares look to be trading on a Price to Earnings (P/E) equation of around 30 and I am uncomfortable paying such a high price for a very new IPO that hasn't released its first full-year results yet.
For this reason I think Estia shares are a hold.
Domino's Pizza Enterprises Ltd. (ASX: DMP) – trades on a P/E of 76, up 110% in the past year
This extraordinary pizza company returns for a second round after a feature in last week's article.
Although – literally as I write – shares plummeted 6% before recovering to trade down 3.9%. Neither movement really changes the potential of Domino's, which has defied subdued economic times to post very strong performance since listing.
This presents investors with an interesting conundrum – can performance continue? Analyst Morningstar says the stock is worth only $28, while Morgan Stanley believes its value is closer to $50.
I believe that as long as the company can continue to maintain its strong return on equity, its performance can continue – there's certainly plenty of room for more Domino's pizza joints in the world.
Domino's still looks to be a cautious buy at today's prices, though investors willing to cough up for a P/E of 76 should watch company updates closely for any hint of a slowdown.
