The Australian stock market has had a good run over the last couple of months but that has made finding bargains a little bit harder.
Rather than chasing shares that are trading at expensive valuations, it might be wise for some investors (including myself) to take a more conservative approach and wait until prices become more attractive.
Two fast growing companies that I am watching very closely in the hope of a pull back include:
Blackmores Limited (ASX: BKL)
Although Blackmores shares have already fallen significantly after hitting their all time high of $220 per share at the start of this year, I still believe a better entry point will be around the $130-$140 per share level.
There is no doubt that its current year growth will be unmatched by most companies on the ASX, but this doesn’t negate the potential risks the vitamin company could face in the medium term. Blackmores still faces regulatory uncertainty from China, raw material supply concerns and the risk of further competition. Its recent move into the baby formula sector is also being questioned and this has been one of the drags on the share price over recent months.
Despite these concerns, the company is still expected to deliver exceptionally strong earnings growth over the next two years at least. CommSec analysts are forecasting Blackmores to deliver earnings per share (EPS) of $5.28 in FY16 which means the shares are currently trading on a price-to-earnings (P/E) ratio of around 28. In FY17, its EPS is forecast to increase by around 25% to $6.60, placing it on a FY17 P/E of around 22.
These valuations are not excessive assuming Blackmores can meet market expectations, although a slightly lower share price will provide investors with just a little more margin of safety.
Sydney Airport Holdings Ltd (ASX: SYD)
Sydney Airport is my favourite infrastructure company but I would be uncomfortable buying at current levels.
The share price has performed extremely well over the past five years (rising 131% excluding dividends) mainly as a result of two factors.
The first has been Sydney Airport’s underlying financial and operational performance. As the two graphs below highlight, passenger numbers have increased consistently over the last few years driven by strong growth from inbound tourists. This growth in passenger numbers has been directly reflected in the company’s growing profitability.
The second factor behind the strength in the share price relates directly to its growing distributions.
In an environment of low interest rates, investors have flocked to Sydney Airport’s reliable dividend. As a result, I believe some investors have priced the shares as if they were bonds causing the shares to become overvalued.
As the graph above highlights, Sydney Airport is forecasting 2016 distributions to be 30 cents per share. At the current share price, investors will receive an unfranked yield of 4.2%.
Although this would appear attractive to some income investors, I don’t believe this provides a suitable return for to compensate for the risk of investing in equities. If the shares traded back towards $6 per share, however, I would feel far more comfortable becoming an investor in this high-quality asset.