Seeing a share price at its highest point all year – or indeed, its highest point ever – isn't a reason not to buy a company. It might make it harder to evaluate that company's value, but good companies trade at higher and higher prices as they perform, so just because a price is 'high' doesn't mean that you shouldn't buy.
However, sometimes it does mean exactly that, because sometimes share prices rise higher than is justified by the returns a company is likely to achieve. But how do you tell which is which?
Cochlear Limited (ASX: COH) – last traded at $93.57, Price to Earnings (P/E) ratio of 36, yields 2.3%
Cochlear is one of the largest providers of hearing solutions into the global market, with operations in 20 different countries. The company enjoys enviable profit margins, strong diversification and significant demand as a result of ageing populations and ongoing expenditure on healthcare.
New products appear to be universally well received and management believes further growth is expected in 2016 and indeed, for the long term. It's not always rainbows and lollipops as the stock has a tendency to be heavily sold off on adverse news, but even at today's elevated prices Cochlear looks to be a solid long term investment, underpinned by extensive product knowledge, global diversification and a firm balance sheet.
The economics of its projects and return on invested capital appear much more attractive than Macquarie Atlas' below, and I expect to see Cochlear continue to outperform the market over the long term.
Macquarie Atlas Roads Limited (ASX: MQA) – last traded at $4.20, P/E of 37, yields 2.7%
A very different company to Cochlear, Macquarie Atlas owns a collection of toll roads and relies on rising tolls plus increasing traffic (from urban development) to deliver steadily growing earnings over time.
It anchors these earnings with a large helping of debt and lengthy leases with highly favourable concessions and conditions. Macquarie also stands to benefit from the increased demand from pension funds for this type of assets, as the recent sale of its stake in the Chicago Skyway indicates.
On the downside, Macquarie Atlas has received negative feedback from several of its roads as a result of its rapid fee increases and this resulted in a flat fee schedule on its French routes for 2015. I suspect the company prices its tolls on the very limit of what is considered 'acceptable' by commuters and this may or may not have an impact on traffic or the attractiveness of future concessions given to Macquarie.
So, which should you choose?
Macquarie Atlas's performance is limited by the scope of its balance sheet, its assets, and the development of surrounding areas as well as alternate routes. I believe it is likely to deliver reasonable performance to investors, but Cochlear appears to have a far better shot at outperforming due to the higher-margin nature of its business and its strong balance sheet.
