Value investing may look like bargain hunting sometimes, but growth always has to be part of the equation. Just buying a stock on the cheap may not be wise if there’s a good reason why it is heading down.
We want to buy distressed stocks, not distressed companies. Legendary investor Warren Buffett‘s style of selective contrarian investing (buying beaten-down stocks of only companies with long-lasting competitive advantages) has helped make him very rich.
In fact, Buffett has said that the term “value investing” is redundant because growth and value are: ” Joined at the hip: Growth is always a component in the calculation of value, constituting a variable whose importance can range from negligible to enormous…“
For example, mining giant BHP Billiton Limited (ASX: BHP) is back down under $30 a share, just a few dollars above multi-year lows. It is a market leader, one of the lowest-cost producers of iron ore and most likely will survive this prolonged collapse in iron ore prices.
But could it be a buy now?
Making the case for growth in the near term becomes harder for the Big Australian. Should iron ore slip lower- even down into the $US30s per tonne, then earnings and/or dividends could be constrained. The stock could fall lower and stay low for some time. I don’t feel the growth is there to justify identifying a bottom yet, even for the major miners.
I can think of a better proposition than BHP.
That’s Greencross Limited (ASX: GXL), the operator of a network of veterinary service practices, as well as two store chains for pet supplies – Petbarn and City Farmers. Altogether, it has 125 clinics and 196 stores across Australia and New Zealand.
After buying the pet supplies store chains, acquisitions have slowed. The company is taking time integrating the new businesses, so organic growth may come at a slower pace. Maybe that’s why the stock is back down under $7 a share and hitting new 52-week lows. The market can become bored and distracted.
However, I think this growth story is far from being done. There should be much more room to expand the business nationwide. Even the analysts are forecasting earnings growth of about 20% annually on average for the next several years, so I’m not alone on this.
Trading at 20x earnings and a forward price/earnings ratio of about 15 for financial year 2016, that is pretty good value for the expected growth. Adding Greencross to your portfolio at these lower prices is a good buying opportunity.