Five reasons you should have a mix of retail growth stocks and software growth stocks
The market has witnessed many events and it would be difficult to fetch higher returns amid such volatility. Brexit, softness in US economic dynamics, the dollar movement and most importantly the interest rate decisions by FED, have been moving the market sentiments across the world. It is therefore important that instead of waiting for convincing economic environment, one should identify stock’s that have the potential to outperform even when market conditions are not congenial. Investors are trying to focus on adopting strategies to ascertain above market returns. Therefore, investors should stay ahead of curve and pick stocks with strong potential. In this direction, let’s have a look on why we need to have retail growth stocks in our portfolio.
Leverage the positive sentiment of economy: The retail stocks are often the first shares that come across on the ASX because of their familiar brands. Retail stocks as businesses are also often easier to understand compared to some of the high tech companies on the ASX and therefore to invest in that stock becomes easier. For instance, Woolworths (ASX: WOW) operates on simple business model and the stock has surged over 6.34% in last three months (as of September 20, 2016).
Track Consumer confidence: Most businesses in the retail sector are also exposed to swings of the economic cycles and consumer confidence levels can have a big impact on sentiments. One should look into companies that have a proven track record combined with a positive growth outlook. On the other hand, the retail sector is one of the most difficult and competitive sectors to operate in as there are virtually no barriers to entry. Experts have raised concerns on retailers as competition within the industry is getting more intense. Retail stores had to deal with more Internet-based competition and sell bigger ranges of products to keep shoppers from going elsewhere. For instance, Super Retail Group Ltd (ASX: SUL) stock has been facing pressure and fell over 10.2% during this year to date (as of September 19, 2016). However, to enhance the supply chain, the group has selected the LLamasoft Supply Chain Guru and SupplyChainGuru.com supply chain modeling platform and the LLamasoft Data Guru visual data blending and analytics tool to model and optimize their complex supply chain operations. Furthermore, the group has increased its shareholding from 50% to 95% in Infinite Retail in November2015.
On the other side, investor’s need to balance their portfolio by having software growth stocks which could offset the volatility from the economic conditions and consumer sentiments impact on the retail stocks. Technology stocks were outperformer on ASX in midyear reporting season, while on the other side retail growth stocks did struggle a bit to deliver performance. IT services providers, cloud providers and niche players were the performers of the season. ASX information technology index was up about 3.89% in the one month as on August 29, 2016, as compared to a decline of 1.68% in ASX 200. Emerging tech companies reported a significant earnings growth, which would be driving the larger part of ASX. The trajectory of a lot of the earnings growth would gradually result into the migration into the top 200 and top 100 companies. Many of the tech companies have reported the promised performance and also guided for the growth going forward. Let’s now have a look on why it is good to have software growth stocks in the portfolio.
Better growth rates against other sectors: Most of the strong tech company’s fall under the software-as-a–service business model, which helps them get a high percentage of recurring revenues. Moreover, many of them have offshore presence, which insulates them from local volatility, get good currency conversion and have strong growth outlook. These companies therefore manage to guide enormous growth and strong visibility of income. Additionally, they are capital efficient businesses, which don’t require a lot of capital to grow as they are into software selling business. This also helps them to grow at comparatively higher rate, which has been seen in the recent performances of these companies.
Delivered solid profits: Many of the tech companies managed to report profit numbers, despite weak economic condition, weak dollar and slowdown from China. Companies have also seen a rise in IT spending from the Government. International business performance has also contributed to some of the businesses of tech companies. For instance, Nextdc Ltd (ASX: NXT) surprised the street analyst by reporting a 58.9% rise in revenues for FY16 and guided for $116-122 million of revenues for FY17. As a result, the stock rallied over 81.25% during this year to date (as of September 21, 2016) as compared to the S&P/ASX 200 index that rose 0.89% for the same period.
Well positioned to capitalize the changing dynamics in the industry: Smart tech companies capitalize on their dominance of a certain market to disrupt additional market. At the same time, not all tech giants have this capability, while some mid cap and small cap tech stocks might be well positioned to benefit from the changing industry dynamics.
Overall, with the recent trend in both the retail and the software growth sector and careful selection of stocks within these sectors can play a pivotal role in balancing for a return yielding portfolio.
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