Credit Suisse names new market darlings

Credit Suisse has named new favourites, as some longtime darlings trade at values well above peers overseas.

Buying market darlings with price to earnings ratios above 30 times has not proven a “profitable investment strategy” historically, says Credit Suisse.

Credit Suisse has spruiked a new breed of market darlings as some of the longtime favourites of investors’ trade at values well above their peers overseas.

The investment bank’s prominent local market strategist Hasan Tefvik warned Australia’s hottest stocks were trading at levels seen only once before in history, leaving them prime for a fall and opening the door to some new options including petrol retailer Caltex and BHP spin-off South32.

“Australia has the most expensive market darlings in the world,” he said.

“Our darlings trade on a forward PE of 38 times. By comparison the darlings in the US trade on a mere 25 times.

“There has only been one other time in the last 20 years when Aussie darlings have been more expensive. And that did not end well for the shareholders.”

Mr Tevfik said buying market darlings with price to earnings ratios above 30 times had not proven a “profitable investment strategy” historically.

The issues are magnified by the coming risks associated with a rise in bond yields – a danger that has been labelled the ‘bondcano’ threat by Credit Suisse – and the end of the profits recession in Australia.

The investment bank recently tipped the profits recession to come to an abrupt halt next year, aided by a recover in commodity prices, with the materials sector outperforming all others on the local market this year in anticipation.

“As the scarcity of growth diminishes, with a recovery in market earnings, the growth premium currently embedded in the darlings should also diminish,” Mr Tevfik said.

Given pessimism around the sustainability of valuations for current market darlings, Mr Tevfik urged investors to attempt to find the next batch of favourites.

Credit Suisse tagged Caltex, Eclipx, Mayne Pharma, Nufarm, Star Entertainment and South32 as potential new market darlings given their strong balance sheets, management and profit margins.

However, while they have the characteristics of potential darlings, they collectively trade at a more reasonable valuation of 17 times earnings.