There will be many investors and market commentators who’ll tell you that you need to spot a growth share quickly before it takes off while the risk/reward is still in your favour.
While I agree that investors shouldn’t overpay for a share, be that a growth share, or any other for that matter, it can still pay us to buy into the growth that’s on offer, even if all of our instincts are telling us that the purchase no longer offers us value.
Anchoring on a price
Turning to the chart, let’s look at premium mixer producer Fevertree (LSE: FEVR). It has started another leg up with the shares rising as much as 20% yesterday on news that strong sales in the period-to-date means management anticipated results for the full year to December will be “materially ahead” of market expectations.Â
I wonder how many of us would have thought that the shares had gotten away from us when they initially shot up back in July 2015? However, as we can see below, what actually happened was that the shares actually doubled from that point!
Obviously the question now is whether the shares still offer value, or has the risk/reward tilted out of our favour?
Well, before yesterday’s rise, the shares exchanged hands on a rather punch rating of nearly 40 times forecast earnings, according to data from Stockopedia. After the price rise, this will of course increase until analysts start to upgrade their forecasts, which will bring the PE back down a little. So on the face of it, now could be another buying opportunity as winning shares tend to keep on winning.
Having your cake and eating it
Another growth share that some investors will be kicking themselves for missing as they think the share price has risen too far is Patisserie Holdings (LSE: CAKE), the UK-based upmarket café and casual dining retail outfit.
There aren’t many good retail rollouts in my view, as some run out of steam and some find that their format just doesn’t connect with customers in other areas. However, in my view this is one of the best right now. It’s already highly profitable, generating a lot of cash, which is funding its rollout and enabling management to adopt a progressive dividend policy.
True, the shares currently trade on a September 2016 P/E of 26 times earnings, falling to 23 times in September 2017, however I would expect this to come down in time given the confidence management expressed at the interims on Wednesday.
A question of balance
While growth is good, and should form part of most investors’ portfolios, some of the most successful investors diversify their portfolios to include both growth and income stocks. With that in mind I’d be a holder of the more diversified beverage business Britvic (LSE: BVIC), which also announced results yesterday.
It’s true that the growth on offer here is small, indeed organic growth actually fell while reported growth only increased due to the recent acquisition in Brazil. However, management still saw fit to increase the interim dividend by 4.5%, well above inflation, while maintaining guidance for the full year.
And if you need any more proof that this stock should be included in your portfolio, just look at the performance over the last three years when compared to the FTSE 100. Need I say more?