For many investors, share prices mean everything. In other words, if a share price goes up, it can mean one of two things: either sell because a sharp fall is just around the corner, or buy more as the stock has momentum and could move much higher. Similarly, after a share price has fallen heavily, investors will often think one of two things: sell because the stock is on a downwards trend, or buy because the stock is now much cheaper and may be all set for a turnaround.
Of course, the reality is that a major share price movement on its own does not tell us all that much about whether or not it is a good time to buy a slice of a company. After all, the quality of the business, its financial standing, valuation and growth prospects are far more important than its short term share price performance. As such, even a major rise or fall in a share price should not necessarily prompt an action on the part an investor.
For example, packaging company, Amcor Limited (ASX: AMC), and pharmaceutical stock, CSL Limited (ASX: CSL), have seen their share prices soar in the last year. In Amcor's case it is up by 38%, while CSL has risen by a whopping 51%. However, both companies appear to fully justify such generous rises and, looking ahead, appear to offer considerably more capital gain potential.
In the case of Amcor, its expansion into fast-growing markets across the developing world is positioning the business extremely well for long term growth. Certainly, there are costs involved in making acquisitions and establishing an efficient, slick supply chain in new territories and in expanding in regions where Amcor already has a presence. However, it provides the business with exceptional growth potential, while its reliance on economies other than that of Australia provides increased diversity as well as the potential for an earnings boost from an increasingly weak Aussie dollar.
Similarly, CSL has stunning growth potential, with its bottom line forecast to rise by around 21% in each of the next two years. This puts it on a price to earnings growth (PEG) ratio of just 1.23, which is lower than the ASX's PEG ratio of 1.32. This discount is very difficult to justify since, unlike the ASX, CSL is relatively defensive and far less prone to the ups and downs of the wider economy. And, like Amcor, it should benefit from a weakening Aussie dollar since most of its business is done outside of Australia.
Looking ahead, the two companies appear to be hugely reliable. Certainly, their bottom lines may fluctuate in the short to medium term but, in the last 10 years, they have grown their bottom lines at an annualised rate of 8.4% (Amcor) and 21.4% (CSL). This consistency and excellent long term track record holds huge appeal for investors while the Aussie economy endures a rough patch and, while their shares may be a lot more expensive now than they were a year ago, Amcor and CSL appear to be on the cusp of further stunning share price gains.
