Recently, Smith started a new position in his flagship fund and I’m wondering if I should follow him and buy the stock (which has fallen about 40% since late November) for my own portfolio. Let’s take a look.

‘Britain’s Warren Buffett’ has spotted an opportunity

The stock Smith has been buying recently is Adobe (NASDAQ: ADBE). It’s a leading provider of creative software (Photoshop and Premiere Pro are two of its key products). It also offers marketing and data analytics software that helps e-commerce businesses give customers better experiences.

Listed in the US, Adobe currently trades at around $390, down from near $700 in November last year. At the current share price, it has a market-cap of about $184bn.

A classic Fundsmith stock

I can see why Smith likes Adobe. For a start, the company is generating strong top-line growth on the back of the expanding digital content market (i.e. YouTube). Over the last three financial years, revenue has climbed from $9bn to $15.8bn. This year (ending 3 December), Wall Street expects revenue of $17.9bn.

Secondly, profitability is very high. Over the last three years, return on capital employed (ROCE) has averaged 25.7% (Smith loves high ROCE companies). Meanwhile, gross profit margin has averaged 86% over this period. A high gross margin should protect it from inflation.

Additionally, the company has a very strong brand and reputation. Adobe’s Premiere Pro, for example, is generally seen as the gold standard in video editing software. This provides a competitive advantage and gives it pricing power (which could also help it beat inflation).

Finally, it has a strong balance sheet with a low amount of debt. So overall, Adobe is a classic Terry Smith stock.

Should I buy Adobe shares?

Adobe is actually a stock I’ve been monitoring pretty closely recently. I think it has a lot of appeal, and in July last year, I highlighted it as a stock I wanted to buy in the next stock market crash.

At the time, the valuation was very high. With the share price near $600, the forward-looking P/E ratio was near 50. Today however, it’s a different story. With analysts expecting earnings per share of $13.70 this year, the P/E ratio is now only 28.

At that valuation, Adobe is a ‘buy’ for me. This is a high-quality business with plenty of growth potential. Now that the P/E ratio is under 30, I see growth at a reasonable price. I’d be comfortable buying the stock for my own portfolio at that valuation.

Of course, the big risk here is that technology stocks could continue to underperform. This year, rising interest rates have hit the tech sector hard. There could be further pain for the sector ahead in the near term.

However, in the long run, I think there’s a good chance this stock will do well. That’s because it’s set to benefit from the growth of both the digital content and the e-commerce industries.

Polaris

Polaris (NYSE:PII) manufactures recreational vehicles, such as motorbikes, snowmobiles and quad bikes. It’s one of the best-established powersports brands. There are two major headwinds facing the company at the moment. The first is inflation. High commodity prices means that Polaris has to spend more manufacturing its vehicles and then try to pass this on to its customers. The second is global supply chain issues. Difficulties getting hold of parts — most notably semiconductors — increase the time it takes Polaris to build its vehicles, slowing down revenues.

While the company’s stock is trading as though investors are seeing an enduring problem here, I’m anticipating both of these headwinds turning out to be temporary. An investor buying Polaris shares today could pick them up at a price-to-earnings (P/E) ratio of around 14, but I don’t believe this tells the full story. This is a company that will have ups and downs, yet I think that now might be a good time to invest. I’m looking at adding some shares to my portfolio at the moment.

Adobe

Unlike Polaris, Adobe (NASDAQ:ADBE), is fairly well shielded from inflation. The company makes software for creative publishers. Its line-up includes photo and video editing programmes, e-signature apps, and marketing software. As a software company, it doesn’t have to buy in physical commodities or materials to sell its products. The result is that those products tend to have high margins and its stock tends to have a high price tag. 

To my mind, Adobe is clearly a wonderful business. The trouble is, nearly everyone else seems to agree. As such, Adobe’s shares are almost never cheap. They’ve been falling recently, though, so the question is whether or not they’ve fallen enough to make the stock attractive from an investment perspective. I think that they have.

Adobe shares currently trade at a P/E ratio of just over 40. That’s quite high, but with earnings forecast to increase by around 25% annually, I take the view that Adobe has the capacity to justify this price tag. I also believe it’s worth noting that Adobe’s shares have historically traded at an average P/E ratio of around 52. While that by itself isn’t a reason to buy a stock, I think it’s worth paying attention to.

Summary

Right now, I’m looking at two major themes as I search for stocks to buy. The first is companies that are facing inflationary headwinds. I think that inflation will subside over time (though I’m not taking a view on exactly when that will be) and that companies like Polaris will be able to use their strong brands to pass on a good amount of their additional costs. I’m also looking at technology stocks that have been falling as interest rates rise. And I believe that Adobe might have fallen too far, providing an opportunity for investors like me. At today’s prices, I’d be happy buying either for my portfolio.

Adobe

The first stock on my list of growth stocks to buy in March is Adobe (NASDAQ:ADBE). The company provides software on a subscription basis. Its gross margins are huge at over 80% and its net margins are in excess of 30%. The company’s balance sheet is strong, with interest payments on debt accounting for less than 2% of operating income. Lastly, the fact that it is the industry standard makes it extremely difficult for users to switch to different software, meaning the company has a huge economic moat. 

Over the last five years, the company has averaged revenue growth of over 20%. This is impressive, but if it shows signs of slowing, I suspect that the stock will fall as a result. I think, however, that Adobe’s competitive advantages will persist, and that this will prove to be a great growth stock for me to buy in March. 

Experian

The second growth stock I’m looking at this month is Experian (LSE:EXPN). The company provides credit information to lenders to help them make decisions about who to offer loans to. Like Adobe, the company has a huge competitive advantage. It has a huge database that is almost impossible for a competitor to regulate. Moreover, it provides a service that it is very difficult for its customers to live without.

The risk with Experian comes from the company’s negative working capital model. Experian regularly operates with current liabilities in advance of its current assets. This can limit the company’s financial flexibility. As a result, Experian’s share count has fluctuated in recent years. But the fluctuations have been minor and I think that Experian’s advantages are enduring. This means that Experian is a growth stock that I’d look to buy in March.

Tyler Technologies

The last company on my list of growth stocks to buy in March is Tyler Technologies (NYSE:TYL). This one might be less well-known than Adobe or Experian, but I think it might be a nice under-the-radar investment opportunity for me.

Tyler Technologies provides software platforms to government organisations. This facilitates things like paying water bills or filing court documents. Like Adobe, Tyler Technologies enjoys high gross margins. Unlike Adobe, Tyler Technologies operates in a niche where the competition is almost non-existent and the company has plenty of scope for expansion. 

Shares in Tyler Technologies come with a hefty price tag. The stock is not cheap and there is some significant growth already priced in. The lack of competitors, however, means that Tyler Technologies has a relatively clear path to growing its business for the foreseeable future, so I think that the risk of underperformance is somewhat limited.

Of course, if you’re a long-term investor like myself, volatility shouldn’t be feared. Long-term investors want to be buying shares at the cheapest levels possible and market pullbacks tend to provide great buying opportunities.

Recently, I’ve been thinking about the stocks I want to buy in the next market crash. With that in mind, here’s a look at two shares high up on my ‘buy list’.

The UK’s best fund managers love this stock

One stock I’d love to own is Intuit (NASDAQ: INTU). It’s a leading provider of accounting and financial software (QuickBooks and TurboTax are two of its main products). This stock is owned by a number of top fund managers including Terry Smith and Nick Train – two of the UK’s best stock pickers.

There’s a lot to like about Intuit, in my view. For starters, sales are ‘sticky.’ Once customers sign up to an accounting solution such as QuickBooks, they are unlikely to switch to a competitor as a switch would be time consuming and costly.

Secondly, Intuit has a great growth track record. Over the last five financial years, revenue has climbed from $4.2bn to $7.7bn. For the year ending 31 July, analysts expect revenue of $9.4bn.

Third, Intuit is a very profitable company. Over the last three years, return on capital employed (ROCE) has averaged 30%. Intuit currently trades at 47 times next year’s forecast earnings. That valuation looks a bit high to me. To my mind, the stock is priced for perfection. If growth stalls, the stock could underperform.

I’d prefer to buy the stock at a lower price. So, I’m hoping I can pick it up at a lower valuation in the next market crash.

A stock for the digital revolution

Another stock I’m hoping to buy in the next crash is Adobe (NASDAQ: ADBE). It’s a leading provider of creative software (Photoshop, Premiere Pro, etc). It also offers marketing and data analytics software.

The reason I’m bullish on Adobe is that the digital content market is growing rapidly. Just look at YouTube. Today, over 500 hours of content are uploaded to the platform every single minute (up from 35 hours in 2010).

Adobe is benefitting from the growth in content because it offers best-in-class creative software. Its video editing software, for example, is regularly ranked as the best software for creating YouTube videos.

The high demand for Adobe products is reflected in the company’s recent results. In the last quarter (ended 4 June), revenue was up 23%, while operating income was up 38%.

Annoyingly, I was very close to buying Adobe shares back in May when they were trading at around $475. I’m kicking myself for not buying because they have since shot up to $600.

At that price, the stock has a forward-looking P/E ratio of around 50. That’s not an outrageous valuation for a software stock but it doesn’t leave a huge margin of safety. If future growth is disappointing, the stock could take a hit.

So, I’m going to be patient here. Hopefully, I can buy the stock at a more attractive valuation in the next market crash.