Where to next for the Australian stock market is a question on nearly every investor's lips. Over the past 12 months the S&P/ASX 200 (INDEX: ^AXJO) (ASX: XJO) has gained just 1.2%, while the last five years have produced gains of just 10.8%. These are very ordinary returns considering the risks involved with investing in equities.
Despite the unacceptably low gains in the overall market, there are plenty of individual stocks which have provided more than adequate (in fact outstanding would be a more appropriate adjective) returns for investors.
The key has been for investors to accurately identify these stocks and to take meaningful portfolio positions in them.
The following three stocks have been amongst the very top performers in the S&P/ASX 200 index over the past year.
- Domino's Pizza Enterprises Ltd.'s (ASX: DMP) share price has rallied from below $14.50 to $29 over the past 12 months providing a gain of 105% to shareholders.
- Western Areas Ltd's (ASX: WSA) shares have rallied 59.5% and are currently trading at $4.45.
- TPG Telecom Ltd (ASX: TPM) has experienced a 60% rise in share price to $7.10.
What's next?
Shareholders in the above three stocks are sitting pretty, however, the question now is whether further share price growth can be expected over the coming year.
In the case of Domino's, consensus forecasts are for approximately 20% growth in earnings per share (EPS) over each of the next two years. This is an impressive growth rate, however, with a forecast price-to-earnings (PE) ratio of 35.6x in FY 2016 it's hard to feel that the market isn't already fully pricing in these expectations.
Analyst consensus (according to Morningstar) has Western Areas growing EPS by 150% and 49% over the next two years. Based on these assumptions the stock is trading on a FY2016 PE of just 7.4x. At these levels the nickel sulphide producer could continue to rally further.
It looks like TPG may have reached the end of its fast growth stage with consensus forecasts showing a significant drop in EPS growth from 38% in FY 2015 to 6.7% in FY 2016. Based on expectations for FY 2016, the PE is 22.4x which looks too high if only a mid-single digit growth rate is sustained post FY 2016.
