There’s a long way to fall when you’ve reached the dizzy heights of market darling. Just ask Domino’s Pizza.
In 2015, the pizza chain operator was riding high, generating shareholder returns of more than 200 per cent in the previous two years (relative to the ASX 200 accumulation index) and was one of the celebrity stocks of the ASX.
Finding the next ASX daaarling is not easy.
It was a similar story for vitamins maker Blackmores, which generated more than 650 per cent above the market for its investors and was one of the companies everyone wanted to own.
“Every equity market has its favourites,” Credit Suisse equity strategists said, calling them the “glamour stocks” of the ASX.
Getting on board an already popular stock is not a great strategy. Photo: Credit Suisse.
“These stocks have provided great returns, they have saved shareholders big drawdowns and they trade on high price-to-earnings ratios,” the strategists said.
“They tend to be stocks operating on large profit margins. They have strong balance sheets. They are already enjoying solid sales and profits momentum.”
Current market darlings, according to the broker, include a2 Milk, Cochlear, ASX, Corporate travel, InvoCare, REA Group, Steadfast, Costa Group, Altium and Aristocrat.
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Australian investors are firm believers in investing in this type of stock, with market darlings trading on 29 times earnings.
Still, preference for this style of investing isn’t as strong as it was 12 months ago when a market darling basket of stocks commanded a premium of 38 times, the strategists said.
“The relationship between Aussie investors and their market darlings has faded, but still remains strong,” the strategists added.
But, as Domino’s Pizza experience dramatically shows, timing is everything when it comes to investing in the stocks that the market loves the most.
Downside to ‘darlinghood’
“The message is clear. Stocks that have already reached ‘darlinghood’ – those that many like to brag about owning at dinner parties – often have their best returns behind them,” said the Credit Suisse team.
They examined the performance of ASX stocks that fit into the market darling category and came to the conclusion that the best time to own these stocks is, unsurprisingly, in the period before they become overwhelmingly popular.
The strategists said that on their calculations, stocks that achieve darlinghood – defined by their share price momentum and valuation premium against their history and the market – outperform by around 20 per cent in the two-year lead-up to achieving that status, and from that point on outperform by only around 1 per cent a year.
Given this relatively short window for maximum outperformance, the strategists are always on the lookout for stocks that are the next potential market hot stocks – those that have large profit margins, little debt on their balance sheet, and solid sales and earnings momentum.
The Credit Suisse strategists suggest that the market darlings of the future could include Computershare, Eclipx, Macquarie Group, Qantas and Webjet.
Their model portfolio of 12 stocks already included long positions in Qantas, Computershare, Eclipx, and they add Webjet.
More broadly, the strategists are keeping the faith with equities, market darling or not.
“We think stock indices will be buoyed by rising profits,” they said.
“While we are at the stage of the market cycle when ‘value’ tends to outperform ‘growth’ we can’t resist the temptation of adding a few growth stocks to our long portfolio. “
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