The stocks I think have the potential to beat high-flyers like CSL Limited and A2 Milk Company Ltd

Buying expensive quality stocks have been a winning strategy over the past year or so but the market tide is turning and history shows value stocks outperform in the latter part of the bull market.

a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The share price of two of Australia's favourite stocks has just gotten more expensive, even a portfolio manager at Perpetual Limited (ASX: PPT) complained that the stocks are too expensive in an interview with the Australian Financial Review.

But that didn't stop CSL Limited (ASX: CSL) from jumping 1.3% to $160.02 and A2 Milk Company Ltd (ASX: A2M) from adding 0.9% to $12.22 during lunchtime trade. Both stocks are hovering near record highs.

There is a more important issue at the heart of this observation that I will cover later. But first, the surge in their share prices reflect a big shortcoming on our market.

According to Perpetual, investors are being forced to pay top dollar for quality stocks with solid earnings outlooks because there are too few of these stocks listed on the local exchange run by ASX Ltd (ASX: ASX).

The expert believes CSL and A2 Milk are overpriced because you can buy overseas stocks with similar businesses and customers on much lower multiples such as Hong Kong-listed China Mengniu Dairy and London-listed Shire.

Even if these companies have a lower earnings growth profile, they still represent much more attractive options given the large gap in valuation between the ASX-listed and offshore-listed stocks.

The irony is that Australian companies often complain that the valuations of their overseas rivals are higher than the multiples local investors are willing to cough up.

But what is perhaps more significant about Perpetual's observation is that buying bargains (or value stocks as the experts like to call them) have not been a particularly rewarding strategy over the past year or so.

Stocks like CSL, A2 Milk and Altium Limited (ASX: ALU) have never been classified as cheap but they have delivered some of the best returns on our market. It is these expensive stocks that dominate the league table.

But this is actually to be expected for this part of the bull market cycle. Value stocks don't typically do well until the late stages of the bull market and I think we are approaching that part of the cycle as I believe sentiment will turn decidedly negative towards the latterr part of this calendar year or in 2019.

This isn't the time to be quitting equities though. Far from it. But what it does mean is that this is probably the time to take some profit from these big winning trades and start looking at stocks with a positive earnings outlook but have been underperforming the S&P/ASX 200 (Index:^AXJO) (ASX:XJO).

It's stocks like Nufarm Limited (ASX: NUF) and Webjet Limited (ASX: WEB) that I think will offer the best returns over the next several months.

But there are other stocks that are also well placed to outperform the market this year, according to the experts at the Motley Fool. These stocks will benefit from a big investment thematic that is expected to hit the market over the medium to longer-term.

Click on the link below to get your free report on what these stocks are and why they should be on your watchlist this year.

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of A2 Milk and ASX Limited. The Motley Fool Australia has recommended Webjet Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »