By Michael McCarthy

In the early days of 2007 a now deservedly obscure academic published a paper called “Dow 30,000 Now”. At that time the Dow Jones Industrial Average was trading around 12,000, up 50% in five years. The professor argued that the traditional risk premium attached to shares (over bonds) was an unjustifiable discount, and valuing shares without this risk premium would see the Dow shoot to 30,000 immediately.

Of course, the peak of the market arrived later that year without the Dow getting even half way to 30,000. However, it illustrates that big price calls can signal a collective complacency about a market or share. That’s why the calls earlier this year for CSL to power through $100 may be viewed as an alarm.

To be clear – CSL is a great Australian success story. Born out of the old CSIRO laboratories, it has researched and developed its way to global leadership of the blood and plasma industries. Its track record is outstanding, and its R&D pipeline remains full. There is nothing “wrong” with CSL. The demographic drivers of investment in healthcare remain in place, in that populations in wealthy nations continue to age. So there’s nothing wrong with the sector either.

However, companies and share prices don’t power upwards forever. Every firm, and every share price, is subject to hiccups. It may be argued that CSL is a victim of its own success – it’s been performing at extraordinary levels for so long that it is now expected. So, despite 2014 sales growth at a miserly 0.31%, and earnings growth around 2%, analysts are forecasting 14% sales growth and 27% earnings growth for 2015.

This means CSL is trading on around twenty times 2015 earnings, with long term growth expectations around 16%. This P/E of 20x is calculated on current prices, after a 10% share price pullback. These numbers would be demanding for a tech start up, let alone a mature company.

And the share price remains near historic highs:

The 12% pullback over the last six weeks is in line with the market. In other words, it’s about overall share market sentiment rather than any view on CSL. However, the potential for a specific trigger is real. Product issues are common in this and related industries – witness the travails of Cochlear and Baxter over the last few years. A second year of below forecast earnings could spark a round of analyst downgrades, spurring selling, and in turn forcing further revision of estimates. 

Without detracting from the skills and exemplary performance of management over the years, the potential for missteps is high, and CSL has barely experienced any. A single blot on its copy book could change the way investors view the stock.

If it does put a foot wrong, the share market reaction is likely to be significant. CSL could pull back to levels between $64 and $72 on a re-rating. Unlike a lot of other leading Australian stocks, there is no dividend yield support level in sight for CSL. If a 20-25% sell off would have a big impact on a portfolio, it may be time to consider selling CSL.