In good times and bad, there are always opportunities to find top shares to buy. That’s because there are so many different companies operating in various different sectors to choose from. But screening for growth stocks is my favourite style of investing. And when I’m looking for such companies, investing in tech shares is a great place to start.
But can I buy cheap growth stocks? And in which tech shares would I invest £1k right now? Let’s take a look some stocks I’m considering today.
Screening for growth stocks
It’s quite easy to find ‘cheap’ stocks by looking at the price-to-earnings ratio, or P/E. This measures a company’s valuation by comparing its earnings to the share price. The lower this ratio is, the cheaper the shares are.
I first rank all stocks by P/E and then scroll down the list. It’s a good way to start generating ideas for companies to invest in. Adding each company’s sector to the list also means I can look out for cheap tech stocks specifically.
Typically, anything over a P/E of 30 could be overvalued, but it’ll heavily depend on expected earnings growth. This is where screening for tech stocks should help. There are many opportunities within this sector to find companies with explosive growth potential.
The cheapest tech stock I’ve found based on P/E is Micro Focus. The forward P/E is only 4, which looks dirt-cheap. However, earnings are expected to decline by 13% this year, and there’s over £4bn of debt on the balance sheet. I can see why the P/E is low because this looks risky. Indeed, the share price has crashed 25% over one year, even though the stock has been trading on such a low P/E.
CentralNic looks a better opportunity to me. It’s another tech stock providing internet domain services. The forward P/E is higher at 11.6, but I still view this as cheap. Particularly as the company recently said it grew profits by 51% in the 12 months to March.
Higher-valued stocks
I’d still consider buying higher-valued stocks. Say, with a P/E over 30. But only if I think earnings will grow significantly.
One company I’ve been researching is tinyBuild, a video games developer and publisher. The current P/E is a lofty 43, but earnings are expected to grow by 55% this year. If achieved, then the P/E would fall to a more reasonable 28. There could be excellent value here if tinyBuild carries on growing fast.
Investing in high-growth stocks can be riskier due to more demanding earnings forecasts. If a company misses estimates, then the share price can crash hard. Nevertheless, finding fast-growing companies can lead to spectacular returns.
Diversifying my portfolio
Once my company research is complete and I’m confident in my selection’s prospects, I’d make my £1k investment. However, it’s risky to only hold one stock.
I’m bullish about the video games industry in general. Therefore, I’ve also been looking at Devolver Digital, a publisher-focused video games company. This could diversify my portfolio from my position in tinyBuild. CentralNic operates in a different area of the tech sector, so this should also help to diversify my holdings.
The result should be a smoother return profile. I’d then take a buy-and-hold approach so my investments have enough time to grow.