Growth is great if you can get it, but it may have a big price tag. Companies that have greatly increased their earnings can rack up attractive share price gains.
But should Foolish investors chase these stocks up?
We saw what happened with investors who snapped up Sirtex Medical Limited's (ASX: SRX) shares, expecting its medical product would soar in sales based on a clinical trial's results. The stock went higher and higher, trading at 67 times earnings. When the trial results turned out negative, the stock crashed more than 50% in one day. The company is still good and performs well, but investors didn't allow for a margin of safety in price.
Magellan Financial Group Ltd (ASX: MFG), an investment management company, specialises in international equities and assets. The company has an impressive record of earnings growth. The stock is up 59% in the last six months and now trades at 41 times estimated forward earnings. It pays a 1.9% yield,
The fund manager will be included in the S&P/ASX 100 Index (ASX: XTO) (Index: ^AXTO) starting next week, so it will have more exposure to larger institutional investors. That could drive the price. In addition, more investment funds are flowing into Magellan, which will give it more money to invest with.
Iconic Australian airline company Qantas Airways Limited (ASX: QAN) has roared up 105% in the past six months as the initial results of its $2 billion transformation program were revealed. It is retiring old planes, cutting its workforce drastically and even catching a tailwind from lower fuel costs thanks to the plunge in world oil prices.
Interim earnings are back in the black. Analysts forecast earnings to grow an average 55% annually over the next two years during the transformation program. The stock's price/earnings ratio is just 11.
It has been a great turnaround stock story and investors who made a contrarian investment when the stock was low have been rewarded handsomely. However, the airline industry is still like a commodity service that is driven by price discounting. Over the long term, it may not be a satisfying investment, so I wouldn't suggest chasing this stock.
