To get the best from investing in a stock market crash, you need a strategy. Typically, investors fall into two camps. Those who look for growth, and those who look for dividends. Which are the best to buy now? I recently asked that very question. Today, I want to dig a little more deeply into investing in growth shares.
But first, what’s a growth share? Think something like ASOS or Boohoo, which have revolutionised the online fashion business and made some investors very wealthy. In the FTSE 100 we’ve Ocado, whose share price has multiplied sixfold in the past five years. But it’s quite rare to see super-growth stocks like those in the top index.
But, to me, a growth stock is simply one whose annual earnings continually grow ahead of inflation. If that continues over a decade or more, it’ll almost inevitably result in share price growth too. And when we use that as a definition, I think the FTSE 100 can throw up some attractive growth shares, especially as it’s falling again.
Earnings growth
Last time, I examined stocks with low PEG values. But I cautioned that a single year’s attractive PEG can be misleading, especially when we’re in a stock market crash. In that situation, analysts will typically be predicting a relatively quick recovery. And that can provide a one-off boost to earnings growth, and make the PEG look unduly attractive. It’s also not such a good measure for cyclical shares.
I’ve started here with FTSE 100 stocks that have PEG values of 0.7, or less, which is often used as a rule-of-thumb cut-off for choosing growth shares. Next, I’ve excluded mining companies, which periodically show up looking like growth shares due to their cyclical nature. Finally, I’ve narrowed it down to 10 which also show five-year EPS growth, up to and including 2021 forecasts.
Top 10 growth shares?
| Company | PEG | P/E | EPS growth |
| Melrose Industries | < 0.01 | 22.1 | +23% |
| Lloyds Banking Group | 0.04 | 8.0 | +13% |
| Vodafone Group | 0.3 | 11.5 | +48% |
| JD Sports | 0.3 | 20.1 | +92% |
| Intermediate Capital Group | 0.3 | 12.5 | +39% |
| Tesco | 0.4 | 12.5 | +158% |
| GVC Holdings | 0.5 | 16.9 | +60% |
| Ashtead Group | 0.5 | 17.3 | +57% |
| Rightmove | 0.5 | 31.0 | +38% |
| Aviva | 0.6 | 5.0 | +250% |
To me, that’s a very interesting selection. It is, perhaps surprisingly, varied too, so there’s decent diversification there. I was a little surprised not to see any housebuilders, but their forecasts are only just getting back to growth. If I do the same analysis this time next year, I suspect that will change and they’ll be included.
I do like the contrast these potential growth shares show. We have Tesco, which has been resilient in the face of the stock market crash — but it looks still undervalued to me. Then there’s Lloyds, which has been hammered by crisis after crisis — is this finally an indication things will get better?
You need to do your own research, but I think this table gives me some ideas to mine. I’ll look more closely at some of these growth share candidates in a future article.