Join our community of smart investors

Reasonably priced growth could get cheaper

Markets have kicked off the new year in volatile fashion but will there still be cheaper entry points ahead?
Reasonably priced growth could get cheaper
  • Fears of interest rate rises have again hit equity markets
  • Growth cases will depend on the exit from the pandemic and coping with inflation

Having started the year strongly, equity markets have sold off on fears of rate increases sooner than expected to combat inflation. This impacts the valuation of companies' future profits and so affects the prices investors are prepared to pay for growth stocks. Furthermore, companies that would have been expected to do well in a full re-opening of the global economy may face issues with supply chains and the pressure inflation may bring to bear on their customers' disposable income.

All of which means that both the 'growth' and the 'reasonably priced' aspects of companies flagged by our screen should be carefully considered. There may yet be revisions to growth forecasts in the next few weeks and the possibility of cheaper entry points definitely exists. 

Once again retailer JD Sports Fashion (JD.) is riding high on our growth at a reasonable price (GARP) screen.  In his recent analysis piece for Alpha, Robin Hardy argued that EV/EBITDA was a better measure for valuing the business. On latest FactSet figures the ratio of EV to estimated full current year EBITDA is still only around 7.2 times. Although it is possible that the demographic representing a large slice of its target market may suffer disproportionately from rising inflation, once the omicron surge is subsided there may be good times ahead for JD. 

A handful of Aim stocks pass all seven of our tests designed for smaller companies. Steppe Cement (STCM)and Michelmersh Brick Holdings (MBH) top the screen. Perhaps reflecting a build back narrative with the pandemic (hopefully) in its last phase.

Download PDF