Growth Stocks Q&A with Marcus Padley

Inside the Growth Stocks Webinar

Answers to your top growth stock questions.

Marcus Padley | 14 November 2024 | Education Corner

Isn’t growth at the mercy of the market? What about the roller coaster ride of shares going up and down?

That’s why you have to be prepared to time growth stocks. I would do that by subscribing to Marcus Today and following the Strategy Portfolio and the Growth Portfolio. The market is okay 85% of the time, but occasionally there are these precipitous moments, and growth stocks will get hit the hardest because, most of the time, they lack traditional (supportive) fundamentals and their share prices include a higher element of sentiment rather than value. We will be all over it in the newsletter when we think you should cash out and in.

What about the capital gains tax implications of "trading" growth stocks vs "buy and hold" and selling gradually on retirement (when income is low)?

Yes, that could be a problem that needs to be handled by you depending on your own personal financial circumstances. It’s always an issue, and it is why so many people never sell because they don’t want to pay tax when they’ve made a profit. But what would you prefer to do, pay tax on a gain or wait until it’s made a loss?

What was Appen's (APX) downfall? A market darling for quite a while as a growth stock. (Ian)

Hi Ian - we should probably be asking about Appen’s resurrection. The share price is up from 30c at the beginning of the year to 287c today after the price jumped on takeover speculation earlier this year. From August 2020, they dropped from over $38 down to 30c. They are one of the few stocks that has been hurt by AI rather than helped. Last year, for instance, they saw a 29% drop in revenue and made a loss, client spending fell, they had a capital raising at a massive 42% discount, were constantly downgraded by analysts, lost Alphabet (Google) as a client, and when we talk about growth stocks being driven by sentiment, they were driven from a sentiment bubble to a sentiment hole in three years. The main issue was that AI introduced new competitors and reduced the demand for manual data annotation services, which was a core offering of Appen.

What about data centres, Marcus? They are growing and reinvesting constantly. No dividends. (Jan)

Of course, Jan - data centres appear to offer perpetual growth. It is an obvious growth area as AI applications demand vastly more processing power. We hold NXT, which recently got dumped on a capital raising but is highly correlated to the NASDAQ. The capital raising proved to be a buying opportunity. The problem with NXT is that there is a fine line between NXT being a growth stock because of data centres and NXT being a boring utility. It is also a company that doesn’t earn anything yet and is not projected to for some years. That is despite revenue of 354 million rising to 411 million, then 435 million. So there is growth in revenue but not earnings (typical profile of the growth company – like XRO for years). No yield. Other data centre plays that rely on AI sentiment and are exposed to data centres include MAQ, GMG, and GDC. All these stocks you will have to sell if the NASDAQ falls over, which is possible. Remember, the NASDAQ dropped 37% in 2022. It can happen again. Until then, you can (un)safely hold them.

Marcus mentioned a spreadsheet with stop losses going red. I don’t see this on Marcus Today. How do you set this kind of thing up? In Excel? (Anne)

We don’t offer a spreadsheet and have, at times, developed stop loss monitoring spreadsheets to help us (pretty simple, really). A fairly simple Excel setup will provide stop loss alerts on Excel spreadsheets, but as I said, they are better used as an alarm system rather than an instruction. It’s pretty simple to set up with some basic formulas in Excel. Put in the code and the price you bought at, the price it is now, and the price that you think you will sell at using a stop loss system (there are many different systems, from a simple percentage to a rolling stop loss or an ATR-based or volatility-based stop loss - see some of the articles we’ve written in the education section). You then set up a conditional format on the Excel spreadsheet, which says if this share price drops below this stop loss, turn the cell background red. Many ways to do it. You don’t really need a formatting prompt; all you need is the discipline to decide what the stop loss is, enter it on a spreadsheet, look at the current share price and ask if it is below. When it is below, it’s telling you to take notice. When it is below every time you open the spreadsheet for a week, and you’ve done nothing about it, it’s telling you that you are a slow learner. But the bottom line on stop losses is that we found they weren’t very helpful to investors; they are more for short-term traders who didn’t care whether they were in BHP, the CBA, oranges, or cabbages. It’s just a price, and it’s just a trade.

Do you also have a direct international or US shares portfolio rather than ETFs? Wouldn’t there be less growth in ETFs compared to direct shares?

No, we don’t have an international portfolio directly investing in international shares. We don’t think we need to. There are enough ETFs listed on the Australian market to provide us with the necessary exposures to international stocks, and as you will find out from the Strategy Portfolio performance, it is not about catching the best stocks, it is about catching the best risk-reward ratio in a growth industry. By definition, ETFs are more diversified and therefore provide only average growth exposures as opposed to specific stock exposures that have the potential to be much better than the average. But for less risk and for some of us, it’s all about risk. Some people are fed up with individual stock risk and the damage that can be wrought on a share price from an unexpected announcement on a specific stock. While you may miss a full exposure to the best stocks (in hindsight), you also have a less than full exposure to the worst. You can sleep at night more easily with ETFs. It’s a personal choice: how much risk you want to take and how much sleep you want to get.

How and when should you buy hedged stocks?

There is nothing complicated about buying hedged or unhedged stocks. In each case, you are simply adding a different currency exposure or removing a currency exposure, and you would only do that if you wanted to bet on which way the currency is going to go. Two points on that: one is that currencies don’t move much, so they don’t matter much, and you should focus on getting the main exposure right and not be distracted by the currency exposure (the hedging is secondary to the main bet). The second is that if you can predict currencies, you have a future as a multi-billion dollar hedge fund manager. In other words, it’s not easy. Most fund managers don’t bother hedging unless they have a very strong view. They take what comes. They are never going to be blamed for getting a currency wrong when investing in an ETF.

Can you name some growth industries and make the difference between a growth industry and a fad?

A fad is generally short-term, and the share prices fly on the hope that companies will one day make money out of a good idea, but they don’t in the end. A growth industry is a long-term industry that delivers real earnings growth to the companies and shareholders involved. A fad can even be long-term, but it sometimes turns out that everyone is deluded long-term. Even if it’s a fad, don’t get too precious about it because fads are opportunities to make enormous amounts of money in short periods of time. Examples include milk powder and infant formula (A2M, BAL, BUB) and Chinese Daigou stocks (BKL). BNPL (APT, ZIP, SZL). Lithium (PLS, MIN, LTR, LRS etc.), battery materials, rare earths, iron ore, uranium, cannabis. All of them have been a money-making fad in the Australian market over the years, and if you sat back and wagged your finger, you are a fool. Most of us did that with Bitcoin. Idiots. You may think it odd to include something like iron ore (BHP, FMG, RIO, CIA), but the reality is that these cyclical stocks that reflect commodity prices come in and out of favour, and you could describe their temporary uptrends as regular fads because they don’t last forever. Some of the best bits in the market are when the market loses its head. If you sit on fundamental piety during those moments, you are denying yourself a very valuable commodity in the stock market, the opportunity to make accelerated gains in short periods. They don’t come around often. The ruthless game you have to play is to make money at any price over any time period. The game is not to do fundamental analysis and get on a high horse about it. Buy and hold is only something you can do in a few very large monopolistic mature companies with large moats, no growth opportunities, and high payout ratios. I’m talking about the major banks. And even then, you will have to stay awake and time them when the next GFC comes around. So there are fads, and there are growth industries; the main difference is how long they last for, and sometimes the fads are based on delusion, mass delusion. The biggest growth industry at the moment, of course, is artificial intelligence. Companies are making real dollars out of it, and we are surely still in its infancy. Cryptocurrencies are the next most obvious. Do you remember the biotech and genomics boom? Any stock that had anything to do with deciphering DNA went nuts. Most of those were based in the US. Remember the SPAC boom. The NFT boom? Other growth industries you can invest in include data centres, cybersecurity, telemetry health, digital health, electric vehicles, cloud computing, and SaaS. Some growth industries persist, while others come and go. Your job is to stay on your toes, play the game when it's on, and be prepared to accept when it’s over. The worst thing you can do with growth investing is to believe your own (and everybody else’s) hype when it has clearly peaked. Sometimes you just have to sell.

Can you name some sectors that are not growth industries?

Easy. Banks. Mining stocks whenever their commodity prices are going down (some commodity price cycles are quite long-term). Utilities. Telecoms. Consumer staples. Real estate investment trusts.

Do you have a date when you expect to launch the Strategy Portfolio fund-style product? (Jon)

Hi Jon - If we rushed it, we could have one ready next month. We might do that. More likely, it will be sometime around Australia Day next year.