MENU

Here’s why all insane valuations will eventually become sane one way or another

The share market, and most other asset classes, have reached continuous highs over the last couple of years.

We’ve seen other types of valuations used, like a multiple of sales, to justify a high valuation.

Anyone paying for a businesses valued at over 100x the last year’s earnings, or even next year’s earnings, are pricing in some big expectations.

Some of the shares to trade with those huge triple digit valuations in recent history include Kogan.Com Ltd (ASX: KGN), Medical Developments International Ltd (ASX: MVP) and Afterpay Touch Group Ltd (ASX: APT).

I may have cherry picked those examples, but they have all fallen significantly since their all-time highs. If you buy at an extremely high valuation the growth expectations are priced in for years.

That means there’s a period of several financial years where the market may decide your hotshot stock isn’t worth as much as you think.

Rising interest rates mean that only the worthiest of fast-growing businesses can command such a multiple. WiseTech Global Ltd (ASX: WTC) has fallen more than 25% since September yet it still trades at 81x FY19’s estimated earnings. It’s trading at 39x FY21’s earnings, which is still a hefty price.

Electronic PCB software market darling Altium Limited (ASX: ALU) is ‘only’ trading at 40x FY19’s earnings – it seems like a bargain compared to WiseTech!

Of course, the same can be said in reverse. A business that is trading with a very low valuation and achieves profit growth will eventually be too cheap for the market to ignore. I thought Zenitas Healthcare Limited (ASX: ZNT) was too cheap to ignore for a business growing nicely organically.

Foolish takeaway

Two shares that seem to be trading very cheaply to me are Paragon Care Ltd (ASX: PGC) and Apiam Animal Health Ltd (ASX: AHX). They are both achieving decent organic growth and are trading at around 10x FY19’s estimated earnings.

Another share that looks good value to me is this top growth stock which grew profit by 30% in FY18 alone.

Is this the best dividend stock with plenty of growth too?

You might not know this market leader's name, but it's rapidly expanding into a highly profitable niche market here in Australia. Even better, the shares boast a strong, fully franked dividend that should balloon in the years to come. In other words, we're looking at the holy grail of incredible long-term growth potential AND income you can watch accruing in your account in real time!

Simply click here to grab your FREE copy of this up-to-the-minute research report on our #1 dividend share recommendation now.

Motley Fool contributor Tristan Harrison owns shares of Altium, Apiam Animal Health Ltd, and Paragon Care Limited. The Motley Fool Australia owns shares of AFTERPAY T FPO, Altium, and WiseTech Global. The Motley Fool Australia has recommended Kogan.com ltd, Paragon Care Limited, and Zenitas Healthcare Ltd. 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.

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.