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These 2 Market Darlings May Best Be Avoided

In investing, knowing what to avoid can be a lot more valuable than knowing what to buy.

Shane Parrish, a really smart blogger at the investment blog Farnam Street (for some trivia, Farnam Street is the name of the street in Omaha which Warren Buffett lives on), said as much in a recent tweet of his:

So, what might investors want to avoid at the moment? My answers shouldn’t be cast in stone, but the duo of Green Build Technology Ltd  (SGX: Y06) and Suntar Eco City Ltd  (SGX: CZ3) could be such shares.

Both have been absolute market-darlings. Green Build Technology has seen its shares rocket to an astounding 770% gain over the last 12 months; this makes Suntar Eco-City’s 115% spike in price in the same period look decidedly pedestrian.

Share price gains

Source: S&P Capital IQ

But an investor who pays attention to the underlying business value of a share probably wouldn’t touch both even with a 10-foot barge pole. That’s because Green Build Technology and Suntar Eco City are both trading at monstrous valuations today:

PE ratio

Source: S&P Capital IQ

For some perspective, Singapore’s market barometer, the Straits Times Index (SGX: ^STI), has carried an average price to earnings (PE) ratio of just 16.6 from 1993 to 2012. And currently, the SPDR STI ETF (SGX: ES3), an exchange-traded fund which tracks the Straits Times Index, is valued at 13.6 times its earnings.

I’m not saying that Green Build Technology and Suntar Eco-City would definitely make for a disastrous investment for investors at today’s prices. But, at the kind of elevated valuations they’re carrying, investors ought to be fully aware of the risks involved with both shares.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn't own shares in any companies mentioned.