The dust has settled after reporting season. Whilst some of the most popular growth shares like Altium Limited (ASX: ALU) continue to get more expensive, some of the better growth shares on the ASX now look a lot better value to me.
That’s one of the great things about the share market. It only takes a few weeks for something to go from expensive to good value.
If I could have $25,000 to invest in growth shares today, this is how I’d do it:
InvoCare Limited (ASX: IVC) – $8,000
The market-leading funeral operator’s share price has fallen to nearly $12, a far cry from the almost-$18 price at the end of 2017.
There are a number of negative reasons for the decline, but I think they are all short-term. A fall in the death rate, the refurbishments impact and rising interest rates hurting the valuation are all temporary setbacks in my opinion.
Share market investors are notorious for putting the short-term ahead of the long-term. Sprucing up its locations is achieving earnings before interest, tax, depreciation and amortisation (EBITDA) 30% higher than expectations according to management – isn’t that a clear sign it’s working? Yes, it loses revenue and increases expenses in the short-term, but in the long run it should be good.
Death volumes are expected to grow by 1.4% per annum between 2016 to 2025 and then increase by 2.2% per annum from 2025 to 2050. It’s hard to argue with that type of prospective organic growth.
InvoCare is trading at 21x FY19’s estimated earnings.
Challenger Ltd (ASX: CGF) – $4,000
The annuity leader is increasing its underlying profit year after year. FY18 was a little disappointing and rising interest rates should hurt Challenger, but its longer-term potential looks solid.
Mandatory super contributions, compound interest and new government rules should all help increase the fund inflows to Challenger over the coming two decades. Particularly when you consider that the number of retiree-aged people is projected to increase by 40% over the next decade.
If Challenger can keep growing profit at high single digits every year it should be a solid performer, particularly when you add in the growing fully franked dividend.
Challenger is currently trading at 15x FY19’s estimated earnings.
BWX Limited (ASX: BWX) – $7,500
We’ve finally learned that the takeover deal will not be going ahead for the natural beauty business.
Whilst this is disappointing for shareholders wishing to sell out, I believe BWX still has a very promising future. Sukin continues to grow year after year and could get a boost if it takes off in the USA. Its American acquisitions could also do well by themselves, but cross-selling between the two regions could be a very good move over time.
The natural beauty market is growing even quicker than the general beauty market. BWX’s underlying earnings per share (EPS) grew by a solid 15% in FY18 despite it being a ‘tough’ year.
BWX is trading at only 15x FY19’s estimated earnings.
Costa Group Holdings Ltd (ASX: CGC) – $5,500
Costa revealed a pleasing FY18 result and predicted that underlying profit (NPAT-S) would grow by low double-digits for the shorter-term. This wasn’t enough for the market and investors may also be a little unsettled by the strawberry scare that’s happening at the moment, despite none of Costa’s products actually being affected.
I believe Costa is the best food-producing business on the ASX and has plenty of avenues for growth in Australia, China and Morocco. If Asian middle class demand for Australian-grown products takes off then it could continue on its upwards trajectory for many years to come with strong re-investment back into the business.
It’s currently trading at 23x FY19’s estimated earnings.
In my opinion all of the above share ideas will be very good market-beating opportunities over the next five to ten years. Whilst the short-term is unknown, each business has compelling long-term growth runways and they are all trading at more attractive value than before.
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Motley Fool contributor Tristan Harrison owns shares of Altium, BWX Limited, Challenger Limited, COSTA GRP FPO, and InvoCare Limited. The Motley Fool Australia owns shares of and has recommended BWX Limited, Challenger Limited, and COSTA GRP FPO. The Motley Fool Australia owns shares of Altium. The Motley Fool Australia has recommended InvoCare 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.