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Growth shares are getting even hotter

Reporting season is nearly over and it’s been a clear theme: growth shares continue to do well.

In a funny way, the growth shares now offer no value and value shares offer no growth. So what can we do with that conundrum?

There is no doubt that Altium Limited (ASX: ALU), WiseTech Global Ltd (ASX: WTC) and others reported good numbers. Many of them showed impressive double digit earnings per share (EPS) growth statistics.

But, because they were already trading at high valuations the strong share price appreciation just makes them seem even more expensive. As an example, WiseTech is trading at 112x FY19’s estimated earnings and Altium is trading at 55x FY19’s estimated earnings.

These are huge valuations. Many investors out there would baulk at paying that multiple for today’s earnings. There are huge expectations built into the price. They could each be a third cheaper and still be very expensive!

Economic theory goes that as the US Fed keeps increasing interest rates growth shares will suffer more because of a higher discount rate back to today’s value. But, just because something should happen doesn’t mean it will.

Logistics is clearly an integral part of the global economy. The world is becoming more connected and emerging markets will play a greater role in both demand and supply of cargo.

Technology is getting more complex and the ‘Internet of Things’ is only just getting started. Demand for Altium’s products will continue to grow quickly. It is aiming to be the clear leader in this space over the next decade.

Foolish takeaway

Therefore, it’s right to say that some growth shares are very expensive at today’s prices. There isn’t much margin of error at today’s prices. Over a 12 month period it would be a gamble to buy today.

However, on a five plus year timeframe, which is how we should be investing, many of these businesses will be earning significantly higher earnings and could in-fact be worth far more in time. Although I won’t be buying any shares of ‘growth’ businesses today at any price, I do want to keep adding to my portfolio. It can be a big mistake to think it’s ‘too late’ to buy shares of a fast-growing business.

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Motley Fool contributor Tristan Harrison owns shares of Altium. The Motley Fool Australia owns shares of Altium and WiseTech Global. 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.