While a relatively rich valuation can be viewed as a bad thing, with it often indicating that a share price could be due for a pullback, this is not always the case.
Indeed, strong future prospects and relative certainty with regard to earnings can contribute to a high valuation. Furthermore, just because a company's valuation is higher than that of the wider index does not mean it can't go much, much higher.
With that in mind, here are three stocks that, while not cheap, could still see their valuations move northwards during the course of 2015.
Woolworths Limited
Despite its shares falling by 16% in the last month alone, Woolworths Limited (ASX: WOW) still trades on a higher P/E ratio than the ASX. Indeed, it still stands at 15.4, versus 15 for the wider market.
Of course, Woolworths' share price fall is due to a mix of disappointing first quarter sales numbers, concerns surrounding the growth of low-cost operators such as Costco and Aldi, as well as challenges faced at its Masters Home Improvement chain. Together, they have combined to knock sentiment in the stock, although this could return relatively quickly should interest rates remain low (and even fall) in 2015.
That's because Woolworths is forecast to offer a real terms increase in dividends per share over the next two years, with annualised growth of 3.2% being expected. And, with shares in the company offering a fully franked yield of 4.6%, their appeal as an income play could mean that Woolworths' valuation moves higher – especially if investors begin to seek out more reliable dividend payers in 2015 and beyond.
Scentre Group Ltd
Also trading on a relatively high P/E ratio is Scentre Group Ltd (ASX: SCG), with the shopping centre operator seeing investor enthusiasm increase for its shares throughout the last few months. In fact, it's up 15% since it listed in June, while the ASX has fallen by 2% over the same time period.
What could be working in Scentre's favour is speculation regarding a reduction in interest rates. Although they were kept on hold at 2.5% this week, concerns surrounding the Australian (and global) economy could prompt the RBA to cut them over the medium term. In that case, retail stocks such as Scentre could gain a boost from potentially higher consumer spending, as consumers take advantage of cheaper credit.
While Scentre does have a relatively rich P/E ratio, its price to book (P/B) ratio of just 1.01 indicates that further price gains could be on offer – especially while it's below the real estate sector's P/B of 1.10.
CSL Limited
With a P/E ratio of 26.9, many investors would understandably give shares in CSL Limited (ASX: CSL) a miss when building their portfolios. After all, that's a whopping 79% higher than the ASX's P/E ratio of 15.
However, investors may be willing to pay an even higher price for shares in CSL as a result of its stability and growth potential. For example, its beta of 0.6 means investors could flock to it as a perceived safer stock in 2015. This is because the stock is less dependent upon the performance of the wider economy for earnings growth.
Indeed, with CSL's bottom line forecast to rise at an annualised rate of almost 16% over the next two years, its potent mix of growth and relative stability could induce a higher rating (and share price) during 2015.
