Many thrifty investors shy away from high-flying stocks with equally lofty price-earnings ratios. When your goal is to buy stocks at a fair price, a price at 30, 40, even 50 times earnings doesn't leave you much of a margin of safety. You really need confidence in the company story to pick it up at such a premium.
But can they be worth it?
Yes, there are some stocks that do deliver over a number of years and shareholders gain greatly.
There are also many cases when they fall flat on their face, sending investors scrambling for the exits.
I have two stocks that may be considered high priced, but are they still worth picking up for further gains?
— iProperty Group Ltd (ASX: IPP) operates property search websites covering a number of Asian countries like Malaysia, Hong Kong, Macau, Indonesia and Singapore. In financial year 2013, the company had just 0.9 cents earnings per share. Based on forward earnings, it's trading at a P/E of 106! The company's largest shareholder is REA Group Limited (ASX: REA), the operator of Australia's number one property search website realestate.com.au, with a 19.9% stake.
Earnings per share in financial year 2014 are forecast to be 2.7 cents, and financial year 2015 is projected to be 7.6 cents per share. That would be a great rise in earnings, but it's difficult to say how the share price will perform. REA Group also started out with very small earnings, but they quickly grew larger. Is it worth it?
I really don't know at this early stage. After the company has a number of years showing steady, strong earnings growth, it may be recommended, but not just yet.
— Ramsay Health Care Limited (ASX: RHC) is trading at 33 times earnings. For a private hospital operator, that might seem high, but the healthcare provider is expected to grow earnings an average annual 18.2% over the next two years. Combined with a 1.5% fully franked yield, the stock isn't a steal, but because Ramsay has a long track record of sustained earnings growth, it is a more credible grower into the future.
That could give an investor more confidence in its business and share price growth. Ramsay has strong management to guide the company through its overseas expansion in Europe and Asia. I think Ramsay Health Care could be worth the premium over the long term.
