It might be said that we are in the era of the growth stock. These companies, often tech-focused and with dizzying valuations, have accounted for many of the best buys in the stock market in the current millennium.
Amazon and Apple fell into this category once upon a time, carrying price-to-earnings ratios in the triple digits, making them eyewateringly expensive on some metrics. Yet, both rewarded shareholders with outrageous returns in the long run.
Contrast these kind of stocks with the value investing approach championed by Warren Buffett, where sniffing out the shares in undervalued firms was a path to success.
The reality is that, in the modern day at least, some of these stocks with extremely high P/E ratios are the cream of the crop. Armed with this growth stock-positive mindset, I asked my old friend ChatGPT to help me discover the next big winner.
Q and A
My question: “Some high price-to-earnings ratio growth stocks are worth the high valuation – which ones do you think at the moment I should buy? Give examples of US and UK stocks please.”
ChatGPT’s Answer: ”🧭 Summary: Stocks to Watch
U.S. picks: Apple, Amazon, Alphabet, Nvidia, AMD
U.K. picks: Rolls-Royce, GSK, Babcock, LSEG, Endava”
At first, I was disappointed to be given the names of two of my example stocks. Then, I set about decoding what seemed like a lazy collection of high P/E stocks. The US contingent comprised household-name tech companies with a heavy focus on AI. The British one contained stocks from strong British industries like defense, pharma, and fintech.
What’s more, both lists were populated by obvious names and huge enterprises. Hidden gems these were certainly not. In among my irritation, one name in the British list jumped out to me.
Eye-catching
I’d looked at Babcock (LSE: BAB) shares a couple of years ago and came away impressed. The valuation was high then, too. But if I hadn’t already been heavily exposed to other defence firm, then I probably would have taken the plunge. Had I taken a position in the high P/E stock, I’d have seen my stake triple in a couple of years.
There’s a good lesson there. There’s more to any company than how cheap or expensive it looks. In the case of Babcock, the eye-catching details of the investment case is the firm’s world-leading and state-of-the-art military technology.
Anyone keeping an eye on the sad state of the Ukraine war will have noticed how vital drone technology has become. Well, Babcock is at the forefront, with innovations like SwarmCore in managing large drone fleets.
One of the downsides to investing in any defence stock is its correlation with conflict. I’m sure we’re all hoping for fewer wars around the globe and the end of ongoing wars, too.
Well, if that happens, then demand for defence industry products will fall. In all though, I think Babcock is one worth taking a look at.
