The ASX 200 has seen phenomenal growth names emerge in 2019, but such explosive share price gains can also warrant some questioning as to whether these shares are overvalued. Investors are often faced with the difficult challenge of analysing whether to buy into a high quality, well-managed business that trades at an eye watering valuation.
Here are three ASX shares that have proved themselves as a market leaders, but can also be difficult to buy due to their lofty valuations.
1. Pro Medicus Ltd (ASX: PME)
Pro Medicus is a market darling that has soared more than 200% in this year alone! The company delivered some impressive figures with revenue increasing 47.9% and profit after tax soaring 91.9% in FY19. However, at an almost $4 billion market cap, the company is trading at 76 times FY19 revenue. While Pro Medicus is set for greatness with its suite of health imaging services and technology, the underlying issue is that of the general market.
President Donald Trump has imposed a new 15% tariff on $110 billion of Chinese goods including footwear, clothes and electronic products. A further wave of $160 billion on goods like laptops and phones have been delayed until December. China has hit back instantaneously with new 5–10% tariffs on US agriculture products. Market leaders such as Pro Medicus tend to be the most vulnerable to market pullbacks. For example, Pro Medicus shares fell by more than 20% in two days back on 5 August when trade tensions escalated, bonds kept pointing towards a recession and US accused China of currency manipulation.
2. PolyNovo Ltd (ASX: PNV)
Likewise, PolyNovo is the gift that keeps on giving, up a whopping 240% in 2019. The company managed to grow its revenues by 128% for the year to $13.7 million while reducing its loss by 46.6% despite a rise in operating expenses. The company expects to break even in FY20 however, cash flows will continue to be reinvested to drive growth. As PolyNovo further expands their geographic reach, it should see accelerated revenues from its US, Australia, New Zealand and UK segments, while India and SE Asia represents promising opportunities for further growth.
PolyNovo is in a sound position with growing sales, geographic positioning and $13.9 million cash on hand. However, at a $1.4 billion market cap, this places the company at 102 times FY19 revenue! While the share price has momentum in its favour, it faces the same threat as Pro Medicus.
3. Nanosonics Ltd (ASX: NAN)
Nanosonics shocked the market when its share price soared more than 25% after the announcement of its FY19 results. The company delivered a 39% increase in revenue while operating profit before tax soared 201% on the prior corresponding period. It expects continued momentum in its North American market, while adoption in Europe will continue to grow from stronger fundamentals for adoption and growing awareness. The market expansion in Japan represents a significant, developing opportunity that is pending further clinical study and distribution.
Foolish takeaway
High quality shares will continue to go higher while investors scratch their heads as to why they didn't buy them at lower (but still expensive) prices. However, the US–China trade war is an imminent threat to the stability of global equity market. Investors should hold onto these winners for as long as they can, but also be wary of subtle changes in the general market.
