A Stocks and Shares ISA can be a great asset, but only for investors who can figure out what to buy. Tax benefits aren’t much help to someone who invests in overpriced or permanently impaired businesses.
Over the last decade, growth stocks have been the place to be. But this isn’t something I’m focusing on as I look for stocks to buy for the next 10 years.
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Finding winning investments
Investing is about predicting the future and this is inevitably uncertain. The biggest difference between growth investors and value investors is how far ahead they think they can see.
Growth investors tend to think they can see a long way into the future. They’re happy buying shares at high P/E multiples because they expect earnings growth for a long time.
By contrast, value investors tend to think the future’s uncertain. They’re usually (though not always) wary of the risk of disruption and tend to want this reflected in the share price.
This can sometimes mean value investors miss out on opportunities where companies keep doing well into the future. But it’s not always the case that growth stocks outperform.
Growth vs value
While growth stocks have outperformed their value counterparts as a group over the last 10 years, they haven’t all been successful. Teladoc Health‘s a great example.
Despite revenues increasing more than 3,000%, costs have also gone up and the stock’s now 62% lower than it was when it went public in 2015. That’s not a good result by any standard.
Equally, not all value stocks have underperformed. Over the same period, shares in Premier Foods – a UK company trading at a price-to-earnings (P/E) ratio of 15 – are up over 400%.
That’s better than the FTSE 100, FTSE 250, or S&P 500. And it shows that finding winning investments isn’t as straightforward as looking for growth over value.
The most important thing
Whether it’s growth or value, I think the most important thing is finding a company that has a predictable outlook. AG Barr‘s (LSE:BAG) a good example.
The company’s biggest product is Irn Bru, which has been almost impossible to disrupt in Scotland and equally difficult to export anywhere else. That makes it highly predictable.
This kind of predictability has typically come at a cost – over the last 10 years, the stock has traded at a P/E ratio of around 20. But it’s below that level right now, ranging 18 and 19.
Furthermore, management’s expecting margins to expand as the costs of acquiring BOOST Drinks Holdings in 2022 wear off. So I think there could also be higher profits on the way.
Predicting the future
Investing involves trying to forecast the future and this means there’s always uncertainty. With AG Barr, inflation pushing up the price of raw materials is a risk to take seriously.
Compared to other more technical businesses though, I think it’s easy to assess what the long-term future might look like. And that’s why it’s on my list to consider buying right now.
