When Expensive Shares Turn Out Good

It’s been more than seven years since Singapore’s market barometer the Straits Times Index (SGX: ^STI) closed at an all-time high of 3,876 points on 11 October 2007. Today, the index is at 3,365 points, some 13% lower than its highest close.

Given the index’s dismal performance from then till today, how would you think the trio of BreadTalk Group Limited (SGX: 5DA), Raffles Medical Group Ltd (SGX: R01), and Straco Corporation Ltd (SGX: S85) would have performed if I told you that they were valued at 22, 24, and 34 times their respective trailing earnings back on 11 October 2007?

When pricey shares turn out good

The three shares had expensive valuations back then. For some perspective on how pricey they were, the Straits Times Index’s average PE ratio for the 20 year period from 1993 to 2012 was just 16.6.

But as it turns out, their shares have more than doubled over that seven-plus year period, as you can see in the table below:

Performance table for expensive shares

Source: S&P Capital IQ

Buying shares which carry elevated valuations can often be a recipe for disaster – that’s an important thing to learn as an investor. So why have the trio outperformed the market by such a wide margin despite their high valuations?

It’s the business that matters

There are of course a number of different factors at play here, but the shares’ subsequent business growth from 11 October 2007 onward would have held a large role.

Earnings table for expensive shares

Source: S&P Capital IQ

As the table above demonstrates, BreadTalk, Raffles Medical, and Straco had seen their businesses grow strongly in those seven-plus years (alluded to by the increased profits) – and that had provided a big part of the fuel for their share price gains.

A Fool’s take

Just to highlight again, none of the above is meant to say that buying expensive shares indiscriminately will work – no it won’t. In fact, the odds of making losses with expensive shares are very high. (On an important side-note, buying cheap shares indiscriminately can result in disaster too.)

But, what we’ve seen with the trio of BreadTalk, Raffles Medical, and Straco goes to show that expensive-looking shares can still make for great investments, provided their businesses do grow satisfactorily.

This is important information we should keep in mind, lest we fail to act on a great investing opportunity just because it looks superficially pricey.

For more investing analyses and important updates about the stock market, sign up to The Motley Fool Singapore's free weekly investing newsletter, Take Stock Singapore. Written by David Kuo, it can help you grow your wealth in the years ahead.

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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 owns shares in Raffles Medical Group and Straco Corporation.