The S&P/ASX 200 (ASX: XJO) (^AXJO) has increased from just under 4300 this time a year ago to almost 5200, meaning its stocks were either undervalued, are now overvalued or somewhere in between.
The recent rise has prompted many companies to become extremely 'expensive' in terms of price-to-earnings. I'm not one to take the P/E ratio as the judge between a good or bad investment but it does give a good indication of how investors are valuing the company. Generally, a ratio can be high for a number of reasons, either expectations are high or it has had a recent drop in profit.
The stocks below have taken a beating and expectations have weighed on them.
The first group are small mining stocks, which had hoped to strike it rich in recent years, whether they were prospecting for gold, precious jewels or minerals. However with the price of commodities like iron ore expected to drop in coming years, many smaller miners will be stretched to the limit on costs and production. In addition to weaker demand, higher exchange rates and rising costs has seen these companies already begin to show negative returns from investor expectations.
Mirabela Nickel (ASX: MBN), Evolution Mining (ASX: EVN) and Medusa Mining (ASX: MML) have dropped 66.38%, 52.38% and 55.91% respectively, in the last 12 months. They may have a good business model but the market disagrees.
Conversely, many have said the opposite about banking stocks. With our big four at record highs it's not hard to see why some feel they may well be overvalued at this point in time. Take for example the National Australia Bank (ASX: NAB), which announced yesterday that profit was up 3% overall for the company in the last six months. Looking back over the past 12 months, the share price has risen over 40%, which says to me that the rise has not been justified. Still if you're an investor you'd be happy with the return, in addition to juicy dividends.
Foolish takeaway
Perhaps any of the top 20 listed companies except BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO) are 'expensive' from a growth investor's point of view. As organisations become larger, producing efficient profit is harder, so perhaps we should be looking for companies outside the top 50 that haven't already made their move.
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The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Owen Raszkiewicz owns shares in Rio Tinto.
