MENU

Growth shares are still the way to go at this point in the cycle

There has been a lot of commentary in the financial media about where investors should be positioning their portfolios. There is a lot of capital in Australia thanks to the superannuation sector as well as a large fund manager industry. All of that money has to be invested somewhere.

Some of the ASX’s best growth shares like Altium Limited (ASX: ALU), a2 Milk Company Ltd (ASX: A2M) and Xero Limited (ASX: XRO) are trading at very high valuations.

However, high-performing fund manager Ophir Asset Management is cautioning against shifting completely away from growth shares. I think Ophir are worth listening to because over the past five years the Ophir Opportunities Fund portfolio has delivered an average gross return of 28.9% per annum before fees. The Ophir fund managers also have a lot of their own capital invested in their funds.

Ophir said that rotating a portfolio away from growth and towards value could be a mistake at this stage in the cycle. Larger cap ASX businesses are struggling to deliver meaningful and sustainable earnings growth. The ASX only performed so well over the past year due to a resurgence of resource businesses, which is unlikely to be repeated again.

The high growth shares do have a lot of expectations built into the current price and an earnings miss could result in share price declines, which may mean short-term investors head for the exits.

However, Ophir said that it’s usually not earnings that miss estimates but estimates that miss earnings. I agree – if management give guidance and miss the guidance then that’s the company’s fault, but some analysts are too optimistic.

If growth shares continually beat expectations then the valuation gets more and more stretched until eventually it goes too high. However, Ophir said that this does not necessarily mean that the end of the growth cycle is occurring, simply an adjustment to expectations.

In this current economic environment of low growth it is the growth businesses that will deliver the best results over the longer-term. Ophir has lightened its positions, but a sell-off could mean it’s an opportunity to buy back into those companies.

Ophir also said that ‘value’ shares are not actually trading that cheaply. The best time to pick up these shares are when they are at cyclical lows, which doesn’t seem to be the case at the moment. Cheap shares can stay cheap for a long time. Increasing cash can be an appropriate response until opportunities present themselves.

Foolish takeaway

Some of Ophir’s Opportunities Fund current positions include(d) Afterpay Touch Group Ltd (ASX: APT), Freedom Foods Group Ltd (ASX: FNP), A2 Milk and Experience Co Ltd (ASX: EXP).

I firmly agree with Ophir’s mentality. Over a five plus year period, it is growth shares that will probably deliver the best returns, despite the current high valuations.

Another share that would fit the ‘high growth, good value’ mentality is this top ASX stock that is predicting profit growth of 30% this year and has a PEG ratio of less than 1.

The number one dividend pick this month is revealed for FREE here!

Financial year 2019 is here!

You might not know this market leader's name, but it's rapidly expanding into a highly profitable niche market here in Australia. Even better, the shares boast a strong, fully franked dividend that should balloon in the years to come. In other words, we're looking at the holy grail of incredible long-term growth potential AND income you can watch accruing in your account in real time!

Simply click here to grab your FREE copy of this up-to-the-minute research report on our #1 dividend share recommendation now.

Motley Fool contributor Tristan Harrison owns shares of Altium. The Motley Fool Australia owns shares of A2 Milk, AFTERPAY T FPO, Altium, EXPERNCECO FPO, and Xero. The Motley Fool Australia has recommended Freedom Foods Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The 5 mining stocks we’re recommending in 2019…

For decades, Australian mining companies have minted money for individual investors like you and me. But if you believe the pundits and talking heads on TV, those days are long gone. Finito! Behind us forever…

We say nothing could be further from the truth. To earn the really massive returns, you’ve got to fish where others aren’t fishing—and the mining sector could be primed for a resurgence. That’s why top Motley Fool analysts just revealed their exciting new research on 5 ASX miners they believe could help you profit in 2019 and beyond…

Including:

The best way we see to play the global zinc shortage… Our #1 favourite large-cap miner (hint: it’s not BHP)… one early-stage gold miner we think could hit the motherlode… Plus two more surprising companies you probably haven’t heard of yet!

For free access to our brand-new research, simply click here or the link below. But be warned, this research is available free for a limited time only, and we reserve the right to withdraw it at any time.

Click here for your FREE report!