One of the toughest aspects to investing in growth stocks is having the foresight to "pay up" for an investment. Overpaying for any investment – whether it is a residential investment property, a commercial property, a private business, or a share in a listed company – will rarely provide an acceptable return if you have overpaid to begin with.
For this reason, successful investors develop the skills to accurately value a business or an asset.
The tricky thing about investing in growth stocks is that on first glance a company may appear expensive and therefore be dismissed by an investor when actually the company may be a bargain when the future growth is factored in. The catch here is that often stocks priced for super-charged growth never actually deliver the level of expected growth, ultimately rendering them overvalued. However when they do deliver they can be outstanding investments and well worth the initial price paid.
An example of such a company is online employment classifieds business SEEK Limited (ASX: SEK). On most fundamental valuation metrics SEEK has never looked 'cheap' and this has meant many investors have steered clear, but what a mistake that has been. Over the past nine years, SEEK's share price has gained 580%, compared with the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) which is up just 35%.
The avoidance of 'paying up' is the same reason so many value investors have missed out on the extraordinary 5,000% return from REA Group Limited (ASX: REA) too.
Buy it today and it should still be growing when you retire
With a forecast price-to-earnings ratio of 26 times, once again the value investor would be balking at paying such a high price for SEEK today. However while SEEK's Australian business is indeed maturing, SEEK's management has been well and truly on the front foot, expanding the group's overseas growth opportunities.
The scale of those overseas opportunities were in full view last week as the company participated in the NASDAQ listing of its China-based business Zhaopin in which the company has a 68% shareholding. That holding alone is currently valued at over US$800 million.
