Two “expensive” stocks in the bargain bin

Don’t give up on growth stocks – especially those that have been trading at a premium to their peers. These stocks could be well poised to deliver outsized returns compared to the rest of the market.

It’s an idea that might sound counter intuitive on many levels. First, growth stocks have been on the nose with risk appetite quickly fading in more recent months. You only need to look at the underperformance of small to midcap stocks to see evidence of this.

Secondly, a number of market darlings have fallen hard from grace. Fast food chain Domino’s Pizza Enterprises Ltd. (ASX: DMP) and baby food maker Bellamy’s Australia Ltd (ASX: BAL) come quickly to mind.

In the meantime, growth stocks have to battle the rising risk to global growth with political uncertainty and patchy economic data from a number of major economies – not least Australia’s most important trading partner and frenemy, China.

But this isn’t the time to be throwing in the towel as I think so-called “expensive” growth stocks are better placed than most other class of stocks to outperform this calendar year. Call me an eternal optimist, but there are a few reasons that are giving me hope.

For one, the lack of value among value stocks makes me think a turning point is near. As expensive stocks have fallen out of favour, investors have been scrambling to snap up value stocks. I like value stocks but there’s almost always a reason why they trade at a discount to their higher quality peers. The fact that value stocks have significantly closed the gap with the higher-end of town rings an alarm bell for me.

This has effectively pushed the price-earnings (P/E) ratio for the S&P/ASX 200 Index (XJO) to levels not seen since 2002! According to data from Market Index, the Australian benchmark trades on a P/E of around 18.6X.

In contrast, construction materials company Boral Limited (ASX: BLD) is looking increasingly attractive on a relative basis despite the stock trading on a P/E of around 20X after surging ahead nearly 27% since the start of this calendar year.

I believe the stock is well placed to continue climbing given that its average P/E over the past few years is actually falling when the broader market is trading on ever higher premiums.

Furthermore, its exposure to the US housing market, a sector that I am bullish on, is a big plus in my view.

Another “expensive” growth stock that is well placed to outperform is gaming machine maker Aristocrat Leisure Limited (ASX: ALL). Its half year results that were released three weeks ago gave analysts and shareholders reasons to cheer as it beat market expectations.

Aristocrat has a habit of under promising and over delivering means the stock should be trading at a healthy premium to the market. But this isn’t really the case, particularly on a forward basis given that earnings are tipped to grow by double digits over the next two to three years.

Price, as they say, is really a matter of perception.


Attention investors: The Motley Fool's dividend expert Andrew Page has just released his #1 dividend stock for 2017. Chances are you've never heard of this little company, yet it's a fast-growing consumer favourite - with the shares up 155% in just the last five years! Even better, it's throwing off loads of cold, hard cash. As we speak, these shares are trading on 4.2% dividend yield, fully franked (6.0% gross). Making it a 'best bet' for growth AND income... No credit card required.

Simply click here to discover the name, code and a full investment analysis in our brand-new FREE report, "The Motley Fool's Top Dividend Stock for 2017."

Motley Fool contributor Brendon Lau owns shares of Boral Limited. 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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.