In the last couple of months it has been all about “the market”. We have been more concerned with cash levels than stock selection and as one of my team said yesterday, you know something is wrong when the first word anyone says when they walk into the office is “Bugger” rather than “Let’s have a look at XYZ”.
So that’s have a look at “XYZ” for a day at least, at the growth stocks we have put our faith in. Let’s see if we have made a mistake, whether we are foolish in our faith, whether they are cheap and whether anybody else likes them. Here are the numbers and more.
This shows the performance of our growth stocks over one week, one month, three months, six months, one year and three years. Note here the ASX 200 has fallen 9.8% in the last three months and some of these stocks have fallen 2 to 3 times more than that. It appears that the first thing everybody did when the market wobbled was sell the high PE high performing stocks. It has cost us some significant relative performance in the last two months.
You can see in the table below why these stocks got sold off, they are growth stocks. If the average market PE at the moment is around 17 times, all but two of these stocks are trading higher than that. But before you get obsessed with price you have to look at earnings growth. Look at the earnings growth in year one and two for all these companies. Look also at the dividend growth, the return on equity (10% would be “normal” they are all much higher than that) and look at the average broker target price compared to the share price. If the brokers are right there is significant upside on all these stocks (except the ASX). The bottom line is that these are growth stocks and whilst the share prices have been smashed the fundamentals haven’t changed, there have been no downgrades/disasters amongst this group. The problem is sentiment. Growth stocks attract risk-taking investors whilst the chickens hide in the low return on equity, utterly reliable but boring stocks. When the market falls over it goes “risk off” and this group is deserted, as it has been.
As I wrote yesterday, I am not about to restructure the MT GROWTH PORTFOLIO after a significant correction to build a portfolio that would have outperformed in the fall. On the assumption that there is “nothing terribly wrong” (and that’s the bet) these stocks, as they did yesterday, will be the best performers in any rebound. On that basis I am sticking with them.
OPINIONS AND CHARTS
These are the broker recommendations on each of these stocks from FN Arena - apart from a couple, at these prices brokers are almost universally saying the stocks are undervalued. And those that aren’t (ASX, RMD) are fairly valued rather than expensive. The charts are underneath - not many if any are flashing "BUY" yet, but come a confident rebound they will be quickly seen as oversold.
I note Nick Griffin of Munro Partners (great intellect) in an article on Livewire reporting on his recent presentation at the Future Generation Investment Forum naming two of his best stock ideas globally and one of them was TWE - he says “Most people in Australia will tell you the stock is too expensive. They might say we want to buy Telstra, it’s on 12 times earnings. We would say, yes, you might be right in the short term, but in the long run, if TWE execute and do double their earnings in the next five years and they held that multiple, then that share price should double.”