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Are some of the top performers speculative buys?

Some of the companies that have seen significant share market returns in a year include Bellamy’s Australia Ltd (ASX: BAL), A2 Milk Company Ltd (ASX: A2M), and Flight Centre Travel Group Ltd (ASX: FLT). But, according to Schroders’ head of Australian equities, Martin Conlon, as reported in the Australian Financial Review, the outperformance has led to excessive valuation gains due to “speculative frenzy”.

Many of the top performing companies are small companies with small profits and revenue, despite their relatively large market cap. The abilities for these companies to meet market expectations based on valuations will not be as easy as it seems. As Mr Conlon pointed out there are “massive amounts of market cap for what are really pretty small businesses”.

He sees many of the smaller miners as overvalued compared to the large miners, which have solid assets behind them. Banks are on his buy list for value and dividend yield, even if there are earnings downgrades as a result of the outcome of the Royal Commission.

Bellamy’s Australia, which is up 218% at the time of writing, distributes organic food and formula for babies and toddlers, operating in Australia, China and South East Asia as well as having an online presence. The shares are currently trading on a forward price-earnings- ratio (PER) of 48x.

A2 Milk, up 258%, sources, produces and supplies a2 milk brand, and is involved in the “commercialisation of intellectual property relating to a2 brand milk and related products in New Zealand, Australia and the United Kingdom.” The shares are trading on a forward PER of 49x.

Flight Centre, up 68%, is involved in the travel agency business, providing a complete travel service for travellers in many parts of the world. Trading on a forward PER of 23x, the valuation is not excessive relative to some of the other top performers.

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Motley Fool contributor Rosemary Steinfort has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Flight Centre Travel Group Limited. The Motley Fool Australia owns shares of A2 Milk. 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.

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