It’s almost a biblical test of faith for investors in growth shares this year.
As inflation persists and interest rates rise, the market is abandoning businesses whose valuations rely on future earnings.
But the fact remains rates still remain very low by historical standards and will still be even after multiple hikes this year.
“And the economy’s growing faster now than it was then.”
Both Clark and Tribeca portfolio manager Jun Bei Liu indicated that stock prices will eventually catch up for quality businesses with positive and growing earnings.
But the emphasis is on “quality”.
“Our portfolio has been gradually moving towards more healthcare — some of the structural growth leaders. But remember, these companies have delivered growth for decades and they will continue to do so for the next few decades,” she said.
“Soon the market will come back to those companies and realise that everywhere else growth is going to be hard to deliver.”
Liu and Clark specifically named such 3 ASX shares that are tempting buys at the moment:
‘Future-proof your portfolio’
CSL Limited (ASX: CSL) is “an easy one” for Liu.
“Its earnings were hurt by the pandemic, simply because the blood collection was tough over the last few years,” she said.
“In its most recent update, CSL actually talked [about] that — it’s actually picking up quite quickly, which means earnings will grow quite significantly after that short-term disruption.”
The CSL share price has dropped more than 6.3% for the year so far, and 12.7% since November.
With the cool-off in share price, Liu reckons CSL shares are “trading on a very reasonable multiple for the growth it is going to deliver”.
“The company is fully funded, generating really great cash flow. It’s really helping you to future-proof your portfolio.”
‘One of the highest quality businesses’
According to Clark, “most fundies” would count Xero Limited (ASX: XRO) as “one of the highest quality businesses on the exchange”.
“But it’s been very expensive, and it’s just got significantly cheaper.”
Indeed, he noted the accounting software provider has not reported any results this calendar year, yet its share price has plummeted 40%.
“On face value, it still looks expensive, mainly because they pump about 80% of their revenue back into investment,” said Clark.
“That’s the business that is at the tipping point of the overshoot… that could run hard if we start to see that play out.”
‘Mature’ growth businesses are the safest in this climate
Seek Limited (ASX: SEK) is a “mature” growth business that has “a lot of certainty around the earnings”, according to Clark.
“The multiple compression isn’t going to be too violent from this stage,” he said.
“You still want to avoid businesses that need the share market to fund their future growth. That is not where you want to be at the moment.”
Analysts at Firetrail noticed a pattern in the US that they suspect will be replicated in Australia.
“Since COVID-19, the rate of voluntary resignations in the US has soared to its highest level in over 25 years, well above levels seen post-GFC,” they said in a memo to clients.
“This trend will benefit a company like Seek, who is a beneficiary of higher labour force turnover.”
The Seek share price has lost more than 25% since the start of the year.