Sometimes a stock trading at its highest point all year is still a bargain. After all, great companies will lift the bar ever higher as their success grows.
On the other hand, sometimes market forces conspire to push a company’s value well above a reasonable level, where growth or quality don’t justify the price tag and the risk of downside rises.
The three companies in today’s article are all quality, but they’re starting to look pretty expensive, and here’s why:
Goodman Group (ASX: GMG) – last traded at $6.61, up 27% for the year
Goodman Group has been on a very strong run in recent times, partly thanks to its diversified, international portfolio and huge property pipeline. Analyst Morningstar has a price target of $7.50 on the stock thanks to its urban renewal projects (converting old industrial sites in inner-city Sydney and Melbourne to apartments).
Morningstar believes risk is low as the property will be sold to apartment developers, who will take on most of the risk. However, I am uncomfortable relying on potential upside from these sales to drive share values given that Goodman already trades at a fair premium to its Net Tangible Assets (NTA).
Goodman Group does have a track record of growing earnings faster than its peers and I think share prices are likely to move higher in the near term, but I do not believe current prices offer market outperformance over the medium to long term. I consider Goodman shares a ‘Hold’.
Sonic Healthcare Limited (ASX: SHL) – last traded at $21.85, up 27% for the year
Sonic shares have soared beyond their reasonable value on the back of recent acquisitions in Canada and Switzerland. The market is clearly excited about the acquisitions which contributed to earnings immediately – Switzerland is expected to increase earnings by 8% this year – but I think buyers have overdone it.
As contributor Christopher Georges pointed out in this article, the need for medical diagnostic services is growing and Sonic does have scale advantages over its competitors. However a Price to Earnings (P/E) ratio of 23 makes the stock look expensive, even though it is a high-quality business. I think buyers at today’s prices could still expect to do OK out of Sonic, but I personally would call it a ‘Hold’.
Aurizon Holdings Ltd (ASX: AZJ) – last traded at $5.35, up 7% for the year
Australian rail company Aurizon has experienced a choppy year over investor concerns with increasing investment in coal and iron ore rail assets, as well as industrial relations concerns regarding the termination of Enterprise Agreements (governing employee pay and allowances) in Queensland.
Shares also spiked recently after Aurizon announced it was aware of investor concerns and was continuing due diligence into the commercial feasibility of its proposed Pilbara iron ore rail project. Rail volumes have increased recently as companies lift their output in order to reduce average costs, however I believe there is potential downside for this sector and Aurizon shares look quite expensive considering their steady growth prospects.
While I like the company’s moat and infrastructure nature I believe there are better returns on offer elsewhere and I would consider Aurizon a ‘Sell’.
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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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