Over the course of the last year, the share price growth of cancer specialist, Sirtex Medical Limited (ASX: SRX), and fast-food company, Domino's Pizza Enterprises Ltd. (ASX: DMP), has been staggering. In fact, the two stocks are up by 70% and 61% respectively since August 2014 and this may make investors wish to pile in so as to benefit from any future share price rises.
The two companies, though, now trade on staggeringly high valuations. In the case of Sirtex Medical, it has a price to earnings (P/E) ratio of 46, while Domino's has an even higher rating of 53. Both of these are considerably higher than the ASX's P/E ratio of 15.2 and, as a result, many investors may be put off by them and feel as though the two companies may fail to repeat their superb returns from the last year.
However, the growth prospects on offer from both companies could lead to further share price gains even though their ratings are relatively high. In the case of Sirtex Medical, its bottom line is forecast to rise by 39.1% per annum during the next two years and, when this is combined with its current P/E ratio, it equates to a price to earnings growth (PEG) ratio of just 1.19. That's lower than the ASX's PEG ratio of 1.34 and, furthermore, Sirtex Medical has a much more reliable track record of growth than most of its index peers. For example, its earnings have risen at an annualised rate of over 40% during the last 10 years, which indicates that there is a good chance that its current growth rate will continue over the medium term.
Similarly, Domino's Pizza is expected to increase its net profit by over 25% per annum during the next two years as it seeks to grab a larger part of the fast-food market. It is doing this through a wider menu, with it not just being a seller of pizza, but also items such as chicken and various desserts that should broaden its customer base moving forward. And, when the company's earnings forecasts and its rating are combined, the resulting PEG ratio of 2.1 indicates good value for money when you consider just how reliable Domino's is regarding earnings growth. For example, it has increased net profit at an annualised rate of 24% during the last five years.
Clearly, both stocks have bright futures and, while they are strong growth plays, they may prove to be a lot less volatile than most investors expect. That's because they have betas of 0.6 (Sirtex Medical) and 0.8 (Domino's), which indicate that their share prices should move by less than the wider index in the short run, thereby providing a more resilient shareholder experience. In fact, it could be argued that as a result of their low betas and reliable track records that they have defensive appeal and, as such, appear to offer a potent mix of stability and strong growth prospects.
Therefore, while there are cheaper stocks on offer in the ASX, companies with strong growth forecasts and reliable track records are somewhat rare, which makes Sirtex Medical and Domino's excellent buys at the present time.
