While searching for stocks that offer good value for money is a worthwhile pursuit, sometimes all investors must accept that if a company has a competitive advantage and is hugely successful, then its shares are unlikely to ever be dirt cheap. As Warren Buffett famously said 'it is better to buy a great business at a fair price, than a fair business at a great price'. In other words, price matters, but the quality of the business matters more.
As such, it is often the case that stocks which seem overvalued to many investors not only continue to rise in value, but do so over a long period of time. And, while they can prove to be huge disappointments if earnings growth comes in below expectations or there are external factors to impact on their outlook, sometimes they can maintain a stunning growth rate and deliver an excellent total return.
One stock that clearly falls into that category is Domino's Pizza Enterprises Ltd. (ASX: DMP). It has been expensive based on various valuation multiples for a long, long time. However, it has consistently outperformed the ASX with, for example, its share price having risen by 65% since the turn of the year versus a gain of just 4% for the ASX. Similarly, in the last ten years it is up 1,263% versus 28% for the ASX.
As a result of its stunning share price gains, Domino's now trades on a price to earnings (P/E) ratio of 59 (versus 16.2 for the ASX) and has a price to book (P/B) ratio of 13.8 (versus 1.4 for the ASX). As a consequence, it is hardly cheap. However, when its track record of high, consistent growth and its forecasts are taken into account, it begins to appeal.
For example, in the last 10 years it has increased earnings at an annualised rate of 16.8%, with its bottom line set to rise by 28.4% per annum during the next two years. Furthermore, Domino's has vast expansion potential, with its adoption of a slick ordering process, major use of social media and consistent service easily differentiating it from other national chains and, with a menu that is increasingly becoming less about just pizza, it could make inroads into other types of fast food delivery in the long run.
Similarly, health care device specialist, Cochlear Limited (ASX: COH), trades on a P/E ratio of 32.4 and a P/B ratio of 15.8. However, its shares have soared by 43% in the last year and, judging by recent performance, are showing little sign of slowing down, with them being up 15% in the last month alone. And, while it may be much more expensive than the ASX, Cochlear is on the cusp of delivering excellent earnings growth, with a number of new product launches set to catapult its bottom line upwards at an annualised rate of 40.3% during the next two years.
As a result, the disappointment of recent years, when Cochlear's net profit came under severe pressure, seems to have been forgotten, with investors looking ahead to what could prove to be two superb years for the business. And, as with Domino's, it may be expensive but, with Cochlear offering such bright prospects, its current valuation could prove to have been fair with the benefit of hindsight.
