Whenever there is volatility in the market, I'm less interested in how the shares in my portfolio are performing and more interested in how the shares on my watch list are doing.
So whilst we are not currently in a bear market and last week's turmoil was not quite a 'correction' (yes, it can get much worse), I was quite interested to see the performance of these three companies:
- Xero Limited (ASX: XRO)
- Pro Medicus Limited (ASX: PME) and
-
Volpara Health Technologies Ltd (ASX: VHT)
I like Xero because it has a product built for this era of the cloud and a product that is very difficult for customers to stop using once they sign up. Pro Medicus and Volpara, on the other hand, are both using their technology to solve significant challenges within the healthcare space.
All three companies are using Artificial Intelligence to add value for their clients and they have gross margins that traditional businesses can only dream of.
These companies have been on my watch list because they have qualities that make them great businesses but whether they can go on to make great investments depends in part on their share price.
Wonderful businesses at eye-popping prices
| Company | Market Cap | FY 2018 Sales | Price to Sales ratio | Sales Growth rate | Gross Margin |
| Xero | $5.914 billion | $407 million | 14.5x | 38% | 81% |
| Pro Medicus | $1.01 billion | $36 million | 28x | 14% | 99% |
| Volpara | $218 million | $3.5 million* | 62x | 53% | 70% |
*Volpara revenues are as at 31 March 2018 and include government grants of $NZD 723,000. Assuming another 53% growth in FY 2019, revenues would grow to $5.4million.
Whilst the table above analyses current market caps against trailing sales figures, it still gives a good indication of how these businesses are being valued by the market.
It's hard to say they are overvalued because their market opportunities are so large, but they are certainly not cheap by any stretch of the imagination.
What now?
I'm well aware that the prices of these businesses might never come down. As such, I will subject them to the same process I undertake with all my target investments. I will compare them to other existing opportunities in the market taking into account the opportunity and the price.
If they still come out ahead, I'm prepared to open a small position to get some skin in the game and then add to it opportunistically as the share price changes and the business evolves.
