K2 Asset Management: The businesses most likely to be over-valued are those that are perceived to be able to generate an ever-increasing stream of predictable...

K2 Asset Management: The businesses most likely to be over-valued are those that are perceived to be able to generate an ever-increasing stream of predictable free cash-flows. These businesses tend to have high returns on capital, significant barriers to entry and profit momentum that is well above peers. In Australia, the companies that spring to mind are REA Group, Domino's Pizza, Ramsay Healthcare, CSL, Platinum Asset Management and Perpetual. These market darlings, on average, are expected to generate a return-on-equity of 33% in 2015. As a result, the average PER of the group is 26.4x next year's EPS, more than 70% higher than the market. If we go back to the pre GFC period, these same stocks traded on an average PER of 22.1x, a premium to the market of 26%. However, within a year, these companies had de-rated to an average PER of 14.5x. Beware the market darlings. (VIEW LINK)


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