Growth stocks

We are posting on this idea fairly frequently, because we are tempted, by the fall in some growth names, and so we keep revisiting this framework.

Required EPS trajectory

Even though some growth stocks have de-rated, the implied/required EPS growth CAGR is still enormous across many of them.

Extrapolate the current market cap for a given stock at a “market-like” rate of return for 10 years, and decapitalise that 10 year forward market cap at 18x, (a plausible proxy for the market) and compare the resultant trajectory to near term earnings forecasts, and it still requires sustained double digit earnings growth for all.

Image

The odds that all 40 names there will be double digit EPS compounders for a decade is nil, to my mind.

Note, the rational for using a market-like 18x forward PE ratio in 10 years is because it is a reasonable stab at what “maturity” looks like for many of these companies, by that stage. They aren’t all likely still in the aggressive growth phase, with large licks of market share to take, by then and are certainly not going to be all reinvesting capital into opportunities at the same rate of return.

So, the model is very simplistic for each stock, but generally right, and that’s more than good enough when assessing them as a group.

Important Information: This document has been prepared by Aequitas Investment Partners ABN 92 644 165 266 (“Aequitas”, “our”, “we”), a Corporate Authorised Representative (no. 1284389) of C2 Financial Services, (Australian Financial Services Licensee no. 502171), and is for distribution within Australia to wholesale clients and financial advisers only.

This document is based on information available at the time of publishing, information which we believe is correct and any opinions, conclusions or forecasts are reasonably held or made as at the time of its compilation, but no warranty is made as to its accuracy, reliability or completeness. To the extent permitted by law, neither Aequitas nor any of its affiliates accept liability to any person for loss or damage arising from the use of the information herein.

Please note that past performance is not a reliable indicator of future performance.

General Advice Warning: This document has been prepared without taking into account your objectives, financial situation or needs, and therefore you should consider its appropriateness, having regard to your objectives, financial situation and needs. Before making any decision about whether to acquire a financial product, you should obtain and read the relevant Product Disclosure Statement (PDS) or Investor Directed Portfolio Service Guide (IDPS Guide) and consider talking to a financial adviser.

Taxation warning: Any taxation considerations are general and based on present taxation laws and may be subject to change. Aequitas is not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and investors should seek tax advice from a registered tax agent or a registered tax (financial) adviser if they intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law.

Receive our investment insights

Something went wrong. Please check your entries and try again.