Nothing could better demonstrate this than yesterday's reaction to Vodafone's full-year results. Here is a stock that has already almost trebled in value in the past 12 months. But faced with slightly better than expected pre-tax profits of pounds 650m - a 21 per cent rise - investors merrily pushed Vodafone shares up 25p to a new all-time high of 713p.
On profit forecasts for this year of pounds 830m, the shares now trade on a multiple of 42 times this year's expected earnings - more than double the rating of the market. Vodafone's growth prospects are good, but are they that attractive?
Based on the UK business, probably not. Vodafone is the largest and longest- established operator, but other competitors are muscling in. So Vodafone has to keep cutting charges and offering new services to hang on to its subscribers. The next generation of mobile licences, to be auctioned off next summer, will provide an opportunity to sell a range of new services. But until those are in place, last year's 8 per cent growth in profits is about all Vodafone can hope for.
The overseas businesses, however, are a different story. Vodafone has long insisted that its investments in mobile licences from Sweden to Uganda had huge promise. Now those ventures are beginning to pay off. Profits from continental Europe more than quadrupled to pounds 137.9m, although losses in the Pacific Rim deepened to pounds 59.2m.
Vodafone has other investments in its sights, and although its balance sheet gearing is approaching 300 per cent it has further borrowing facilities to draw on. Given the current state of the market, shareholders would also happily fork out more cash if Vodafone needs it.
Make no mistake, this stock is expensive. But the company's track record and prospects just about justify that rating. If you want exposure to the telecoms sector, Vodafone is a good long-term play.