Unless we think we’ll never see a bull market again, it doesn’t seem controversial to say that the best time to go hunting for growth stocks is when they’re out of favour.
With this in mind, here are two I’m strongly considering investing in before markets turn bullish again.
The share price of FTSE 100 life-saving tech firm Halma is now at a 52-week low. This follows last month’s trading update in which the company said that the first-half return on sales would be at the lower end of its target range due to weakness in its environmental and analysis unit. Its healthcare unit has also suffered due to budget constraints at providers.
Are any of these long-term obstacles though? I don’t think so. Every company’s earnings are cyclical to some degree. Full-year guidance being maintained also suggests management isn’t overly concerned.
While past performance is no guarantee of future returns, it should also be remembered that Halma has managed to raise its annual dividend by 5% or more for the last 44 years. That doesn’t happen without demand remaining resilient through good times and bad. This is partly due to increased regulation over the years — a growth driver that looks very unlikely to stop.
All that said, one key risk here is the valuation. At 23 times forecast earnings, Halma stock still isn’t ‘cheap’. However, the price tag is more reasonable than it used to be (it has a five-year average price-to-earnings ratio of 39!).
Quality going cheap?
A second growth stock I’d consider buying is Burberry (LSE: BRBY). That’s despite the shares also slipping to a 52-week low recently.
Halma’s top-tier peer has had a rollercoaster year with the stock benefiting from the purple patch in earnings experienced by many luxury retailers. However, a slowdown in Q3 revenue at industry giant LVMH has pushed traders to bank profits across the board.
On a positive note, Burberry stock now trades on a price-to-earnings (P/E) ratio of 15. That seems pretty reasonable for a firm that — 2020 aside — usually generates above-average margins and returns on the money it puts to work. As star money managers Terry Smith and Nick Train would attest, it’s these characteristics that have a habit of growing investors’ wealth over time. Throw in tailwinds such as a rapidly rising middle class in Asia (where UK brands are coveted) and I think there’s a lot to like.
Although we’re interested in growth rather than income here, a 3.5% dividend isn’t to be sniffed at until sentiment returns either.
Of course, the market doesn’t care what I think. It’s perfectly possible that growth stocks will continue to be shunned by investors for a while. So, buying now could prove — hopefully only temporarily — painful.
Fortunately, there are ways I can mitigate risk.
The first is to snap up shares in instalments rather than putting all of my spare cash to work in one go. This makes things easier, at least psychologically. It could be particularly useful when looking at stocks still trading on conventionally high valuations, such as Halma.
The second is to make sure that my portfolio is appropriately diversified. By avoiding being too invested in any particular sector, I’m less likely to panic if my positions take a while to show some profit.