Do growth stocks offer a great position during market downturn?
Growth stocks have historically delivered strong performance even during volatile conditions while investors need to have an appetite to take up occasional declines. Dow Jones U.S. Growth Index (INDEXDJX: DJUSGR) delivered 97.59% returns in the last decade (as of June 13, 2016) as compared to Dow Jones Industrial Average (INDEXDJX:.DJI) returns of 62.81%. One need to stay invested in these stocks, and we believe this strategy as a safe bet. The volatility and unpredictability are the characteristics of market and therefore one should have ability to withstand such pressures to enjoy the strong returns from these growth stocks at the appropriate time. Investors need to have an understanding of the target market opportunity for the company, company’s management effectiveness, financial position and initiatives by the group which could generate value to its shareholders.
Meanwhile, investor’s anxiety has been increasing in the month of June 2016 given the major global events outcomes which include Brexit outcome and Fed Rate hikes. Under such scenarios, some of the following growth stocks have still demonstrated the ability to generate value to shareholders despite some hurdles.
For instance, let’s look at Seek Ltd (ASX: SEK) that reported a 19% rise in revenues for Zhaopin Ltd for Q3FY16 while at EBITDA level it reported 12% decline. On the other hand, the Group has delivered strong 22% revenues growth to $482 million while reported EBITDA growth of 15% to $193.3 million for first half of FY16. Underlying NPAT was at $102.4 million, up 9% which does not include early stage ventures expenses. Its domestic business recorded 15% rise in revenues and 18% rise in EBITDA for the same period. SEK still enjoys its market leadership with 33% market share in placement market and 73% in Brand awareness. The growth momentum is expected to continue going forward due to strong platform leverage. Another example is REA Group Ltd (ASX: REA) which demonstrates expansion via acquisitions. REA has acquired Flatmates.com.au Pty Ltd, the market-leading player in share accommodation in Australia for a purchase consideration of $25 million plus potential earn out payments over a period of next 2 years. In February 2016, the company acquired iProperty for cash consideration of $440.1 million for 87% shareholding and remaining 13% were paid $42.1 million in cash as well as shares in newly created, REA owned subsidiary. REA reported 20% growth in revenues to $461 million for nine months ended March 2016 while EBITDA grew 25% to $263 million. The company has also reported impressive 50% growth in cash flow to $146 million. The stock generated 43.68% return over last one year (as of June 14, 2016).
One should also look at stocks such as a2 Milk, which focuses on high margin and differentiated business supported by its integrated IP portfolio. The group’s outstanding success of a2 platinum infant formula (China and Australia) provides long-term growth potential. Furthermore, its strategic investment in USA and UK provides exciting platform for future growth. The management expects FY16 with sales revenues to be in the range of NZ$ 335 million – 350 million against NZ$155.1 million in FY15 while EBITDA is forecasted to be in the range of NZ$ 45 million – 49 million versus NZ$3.1 million in FY15.
A2M’s operating result by segment (Source: Company reports)
Growth stocks from the healthcare sector have also shown great potential. Sirtex Medical Ltd (ASX: SRX) has shown good prospects and recently received regulatory clearance in Canada for its Medical Device License (MDL) for SIR-Spheres® Y-90 resin microspheres. This medical device is approved in key market like Unites States, European Union and Australian and new license will expand the market.
Technology stocks such as Netcomm Wirless Ltd (ASX: NTC) delivered returns of about 305% in the last one year (as at June 14, 2016). NTC recently signed master purchase agreement with a large USA based telecom, to strengthen its global market position. NTC is undertaking private placement of ordinary shares to raise $50 million to fund global growth initiatives. It is also raising an additional $10 million through share purchase plan.
Growing Ericsson/ NBN Wireless roll-out (Source: Company reports
Another stock of interest has been Awe Ltd (ASX: AWE) which has laid out its solid prospects potential with the largest conventional onshore discovery in 30 years, Waitsia in which the company owns 50% share while Origin Energy has remaining 50% share. The company recently informed that the total gross 2P reserves plus 2C contingent resources for Waitsia, Senecio, Irwin and Snaphea increased by 20% to 867 Bcf of gas (AWE share 432 Bcf or79.5mmboe). AWE also has a decent capital position with a net cash of $52 million, and has no debt.
Looking at the above examples, it is well-said that steady growth stocks with stable past earnings and healthy projected earnings growth rates, on an average, yield good returns in the long run. Further, some industry sectors might be picked up judiciously that provide better steady growth candidates. For instance, sectors such as consumer discretionary, industrial and healthcare sectors provide more candidates as compared to technology, telecommunications and utilities.
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