Ideally, I’d like all the shares in my portfolio to be high quality companies with manageable balance sheets and effective management. However, the trouble is that a lot of the time those businesses trade at a premium compared to most other shares, so it’s hard to buy them at a good price. As investors we have to make sure we enter share positions at the right price. Overpaying for an asset is a huge part of creating poor returns. The below two shares are at the top of my watchlist, but they have been too expensive to justify a buy…
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Ideally, I’d like all the shares in my portfolio to be high quality companies with manageable balance sheets and effective management. However, the trouble is that a lot of the time those businesses trade at a premium compared to most other shares, so it’s hard to buy them at a good price.
As investors we have to make sure we enter share positions at the right price. Overpaying for an asset is a huge part of creating poor returns.
The below two shares are at the top of my watchlist, but they have been too expensive to justify a buy in recent times:
REA Group Limited (ASX: REA)
REA Group has been one of the best performing blue chips on the ASX over the past year and the past decade. Its market-leading website, realestate.com.au, attracts the most property buyers to the site which in turn attracts the most sellers. It’s a self-fulfilling circle.
Having that market power allows REA Group to implement price increases with little detrimental effect, the cost of an ad is small compared to the overall marketing budget of a property. The company has done very well at getting vendors and agents to pay for the more expensive ads, further boosting revenue for the same property.
REA Group also has compelling other investments in sites overseas such as in the US, India and South East Asia. Each region has populations much bigger than Australia and could become large profit generators for the business in time.
It’s currently trading at 32x FY19’s estimated earnings.
Costa Group Holdings Ltd (ASX: CGC)
Costa is one of Australia’s leading food-producing companies. It has five main pillars of food types: berries, citrus fruit, tomatoes, mushrooms and avocadoes. It’s that last food, avocadoes, that Costa has been focusing on with all of the demand for it from consumers. Costa recently announced it was acquiring Coastal Avocadoes in Northern New South Wales, which was described as the “hub for Costa’s 4th avocado growing region.”
In that same announcement, Costa also said it had acquired two smaller avocado farms to complement the existing hubs in Atherton and Childers. It also acquired Impi Orchards in December, which expands its citrus fruit operations.
The company is growing in China, it has secured land for FY19 plantings. It also acquired a further 37% of African Blue, which brings its ownership up to 86% and it has options to increase that to 90% over the next three years.
The company is now expecting underlying profit growth of 25% for FY18, which was an upgrade from 20% growth previously. Management believe the company is well positioned for further organic growth alongside “a disciplined value accretive acquisition program”.
Costa is currently trading at 24x FY19’s estimated earnings.
I think both businesses will generate excellent profit growth from here. But, they are both trading at high multiples of next year’s earnings. If either of them were to drop 25% in value I’d be very interested, but for now they will remain on my watchlist.
Instead, this top share could be a much better option as it's expecting profit growth of 30% this year yet is trading at attractive value.
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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended COSTA GRP FPO. The Motley Fool Australia has recommended REA Group Limited. 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 Scott Phillips.