COMMENT
Now Is The Time To Buy Growth Shares

By Maynard Paton (TMFMayn)
December 13, 2005

Remember 1995? When the market first caught dotcom fever and shares were heading for one of the best five-year bull runs ever? It was a fantastic year to buy growth shares -- and market statistics tell me now is the time to invest like it's 1995.

High yield v Low yield

I feel there are many market similarities between 1995 and now. In particular, the valuation gap between the FTSE 350 High Yield and Low Yield indices seems identical to that witnessed ten years ago.

These High/Low Yield benchmarks are good barometers of how the market views 'value' and 'growth' strategies -- and they tell me growth is on its way back.

(Essentially, the High Yield index encompasses those shares within the FTSE 350 that offer above-average dividend yields. These 'value' companies tend to be slower growing businesses, where profits are distributed to investors rather than reinvested back into a mature industry.

On the other hand, the Low Yield index reflects the performance of shares that pay little or nothing out to investors. These 'growth' companies generally retain more in the way of earnings to help produce greater profits and dividends within emerging sectors.)

Here are three reasons why I think growth shares (i.e. the Low Yield index) look set to beat value shares (i.e. the High Yield index) over the next few years.

1. P/Es: The following table summarises the average P/E for the High and Low Yield indices since 1995. It also shows the 'P/E premium' the market has paid for the prospect of greater earnings growth from the Low Yield index:

Year	Average P/E High Yield	Average P/E Low Yield	Low Yield P/E Premium
1995*	14.3	18.1	27%
1996	13.3	20.4	54%
1997	15.1	22.6	50%
1998	16.4	27.6	68%
1999	20.7	33.9	65%
2000	17.6	46.0	164%
2001	15.7	35.4	125%
2002	17.0	26.9	57%
2003	15.7	19.2	22%
2004	14.9	18.6	24%
2005**	14.1	16.2	15%

(*from 13/02/95 **to 12/12/05)

So far in 2005, the P/E of the Low Yield index has averaged just 15% higher than the P/E of the High Yield index. Indeed, the premium contracted to a ten-year low of 8% in June this year. At yesterday's close, the figure was 17% (High Yield P/E: 13.4, Low Yield P/E: 15.6).

Between March 1995 and January 2005, the Low Yield P/E premium dipped below 15% on just eleven days. The last time the P/E premium consistently ran below 15% was during February 1995.

2. Dividends: This next table highlights the average dividend yield available from the High and Low Yield indices since 1995. It also shows the 'yield premium' the market has required from the High Yield index to account for generally slower earnings/dividend growth:

Year	Average Yield% (High Yield)	Average Yield% (Low Yield)	Low Yield Yield Premium
1995*	4.91	2.88	70%
1996	5.06	2.74	85%
1997	4.56	2.48	84%
1998	3.96	2.08	91%
1999	3.29	1.57	110%
2000	3.33	1.16	189%
2001	3.41	1.35	153%
2002	4.06	1.96	110%
2003	4.57	2.36	94%
2004	4.07	2.19	86%
2005**	3.79	2.29	66%

(*from 13/02/95 **to 12/12/05)

So far in 2005, the yield of the High Yield index has averaged 66% more than the yield of the Low Yield index. This figure hit a ten-year low of 42% in July this year and at yesterday's close, it was 67% (High Yield yield: 3.74%, Low Yield yield: 2.24%).

Between March 1996 and May 2005, the yield on the High Yield index was always at least 66% more than the yield of the Low Yield index. The last time this yield premium consistently ran below 66% was during January/February 1996, and before that, in June 1995.

3. Performance: This year could be the first since 1999 to see the Low Yield index outperform the High Yield index:

Year	Total return% (High Yield)	Total return% (Low Yield)
1995	24.4	25.1
1996	13.6	19.9
1997	30.7	19.3
1998	9.7	20.4
1999	16.9	26.6
2000	10.5	(19.5)
2001	(2.2)	(25.8)
2002	(16.4)	(30.9)
2003	20.8	19.8
2004	16.6	8.8
2005*	18.3	20.4

(*to 12/12/05)

It's close, but the market does seem to be catching onto the appeal of the Low Yield index and growth shares.

What now?

Value shares and the High Yield index have been the clear winners over the past few years. But that won't carry on forever. The valuation gap between the High Yield and Low Yield indices is now at 1995 levels -- a great year to buy growth shares ahead of a surging bull run.

I'm so convinced the market will shift towards growth, I've positioned all my recommendations within Champion Shares to capture the forthcoming change in sentiment. So far, every FTSE 350 share I have selected for Champion Shares is a member of the FTSE 350 Low Yield index. Furthermore, the remaining small-cap recommendations all carry yields of less than 2% and have good prospects for superior earnings growth.

I believe now is the time to buy growth shares. You can join me and get ahead of the crowd with this 30-day free trial of Champion Shares. The trial reveals all my recommendations and does not cost a penny.