Is this stock overvalued?

When looking at an investment opportunity the most common question asked is “Will I be paying too much for this investment?  Is this share over valued?” There are no shortage of books or information on how to determine the answer to this question with fancy technical mathematics. However, it does pose an interest question when you think about this concept….. If a stock is over valued then technically it should never rise any further in value at least not for the next 10 years? The problem with some of these calls over time is we find that although an analyst may be saying that a share is overvalued now, it still could continue to rise. Lets look at the example of Ramsey Health Care, an Australia share in the hospital sector.  Now this company has gone from around $10.90 in 2009 to $51.96 today.  This is an increase of around 376% over this time. Or in dollar terms if we had a $10,000 investment in this company in 2009, it would be worth around $37,600 in just over 5 years time. The question which I think goes unasked with this example is “At any time was this company overvalued?”  In other words, was the company’s share price traded at a price which no longer justified the companies fundamental financials? You only have to look over this short time frame and you would have witnessed that a number of investment analysts thought at various points in time considered that this company was over valued.  However, if this was the case then why did the company share price continue to rise in value? The answer I think to some degree might have to do with the vision of an investor.  Most investment analysts are essentially trying to forecast what the future might hold and extrapolate the earnings, expenses, profit etc of the company into the future.  The reality is however, that these estimates largely are unlikely to account for variables such as profit acquisitions, introductions of new profitable product lines, or services which can often change a companies growth or earnings projection. In other words, it comes back to understanding the company’s management style and the intangible elements of this organisation. Whilst history is littered with examples of companies where people have payed way too much and received very little in the way of an investment return, next time your read in the newspaper that a company is overvalued you might think differently, You might delve further into the history of the company, review the culture of this organisation, and find to your surprise that the future may bring a higher share price? So, if you need help constructing a quality investment portfolio make sure to contact AJ Financial Planning for a free no obligation initial meeting either over the phone or at our office.  We currently have clients from around Australia and always happy to chat to see if we can help you achieve your financial goals and future retirement aspirations.