I want to invest in growth stocks – why are there so few on the London market?
In the return of a long-running column from The Sunday Telegraph, Edmond Jackson relates his own experiences as a private investor in the hope that readers will be helped to make better investment choices themselves
I am looking to raise exposure to financial assets after a cash offer for a house came to a bizarre end. But while there are said to be “ever-present opportunities for stock-pickers”, committing fresh capital feels hard as Britain enters recession and the American stock market trades at record highs.
Tuesday’s plunge on Wall Street confirmed what I felt in my bones: America’s economy is going gangbusters yet its central bank, the Federal Reserve, is losing the plot on inflation control.
In November its chairman threw meat to stock market bulls when he entertained serial rate cuts this year, well before the 2pc inflation target was likely to be hit. Now the latest data show that the US economy is running hot and the Fed is backtracking on its message, so shares sell off.
Just the other week Amazon and Meta, the Facebook owner, beat earnings expectations for the fourth quarter of 2023 and their shares leapt to earnings multiples of 60 and more than 30 times respectively.
It would have been great to have snapped up Meta shares down at $93 (£74) in October 2022, when investors threw a tantrum over a fall in advertising revenue. But now, at about $480, the risk/reward tradeoff just does not justify a buy.
Anything related to artificial intelligence on Nasdaq seems able to boast share price growth to rival the dotcom boom in 1999-2000.
Price-to-earnings multiples for growth stocks do feel overblown, especially in tech, so if high interest rates are to remain as a concern I would rather wait and see if share prices retreat.
Growth companies remain the best long-term investment
I still think it is more rewarding to be exposed to a dynamic business able to grow irrespective of the economy than to fret about whether cyclical shares may be attractive enough despite the recession.
But where are the dynamic new names on the London market nowadays? Arm Holdings, the Cambridge microchip success story, clearly knew a trick when it relisted on Nasdaq last year.
After its earnings beat expectations last week its stock has nearly doubled and it now enjoys a four-figure earnings multiple, although it is volatile; it fell by 20pc at one stage on Tuesday.
Arm’s move to New York after some years of private ownership does not exactly leave London a beacon for growth companies.
Private equity seems to be taking over
In the 1980s supply and demand came together for a growth stock bonanza. There was entrepreneurial vigour that showed in the revitalising or floating of companies and there was keen demand as popular capitalism took off thanks to the Thatcher privatisations.
These listings were the hot place to be: we cut out newspaper ads and queued around the block to take part. Nowadays, if there are any good flotations or other share issues, private investors need to be adept or lucky to get anything at all.
The “shell entrepreneur” is a stock market species no more. The likes of Nigel Wray and Luke Johnson would reverse-list dynamic businesses such as PizzaExpress into moribund small companies, some of which then multiplied in value.
It is a sign of the times that shell company Online Blockchain recently abandoned its Aim quotation, presumably to save costs and to avoid becoming a target for a reverse takeover.
The real action nowadays seems to be in private equity, where you need many millions of pounds and industry connections to take part (although London’s private equity investment trusts do provide indirect access to these assets).
Yes, there was a rush of main market flotations in 2021 and 2022, but this appeared to be a cynical cashing in after monetary stimulus during the pandemic fed demand.
In the spring of 2021 the builders’ merchant Travis Perkins finally managed to offload the DIY chain Wickes but by September 2022 the latter’s shares had fallen from around 250p to below 120p and have only recently recovered to more than 150p.
Dr Martens, the footwear company, and Victorian Plumbing, the bathroom products supplier, were other reminders of how the timing of flotations often suits the vendors more than the buyers.
At least healthcare appears to offer growth
AstraZeneca offers a fine example of a decade-long consistent growth chart, although in the past year it has consolidated into a sideways trend – if not a 22pc downtrend since April last year.
At a share price of around £97 the multiple of forecast earnings of around 15 looks broadly in line with targeted earnings, yet a 2.5pc expected yield is no great support should there be any disappointments. It does not convince me for fresh money.
Perhaps some AstraZeneca shareholders are switching into GSK, which at around £16.60 has gained about 5pc this year but still offers a modest multiple of just over 10 times forecast earnings and a higher 3.7pc yield.
A spate of commercialisation news implies that a number of years’ investment is finally paying off for the company.
GSK’s share price chart over the past 20 years could be described as “volatile-sideways” and the shares need to get well over £18 to signal a break-out from the range in which it has been confined; even that level would still imply a consistent 10.7 times earnings multiple if you trust analysts’ forecasts for 2025 earnings.
Major pharmaceutical groups seem less likely to deliver “multi-baggers”, mind. Patents expire and if a drug hits trouble – witness GSK currently settling litigation from cancer patients over Zantac, which was prescribed for stomach acid – it may sully the investment case.
Perhaps with GSK the Zantac story has been around for so long that it is now priced in. Against a market value of about £67bn, I have seen analysts’ estimates of about £4bn to settle the claims.
Smaller pharma shares I usually find too speculative, as they tend to be some way from proving their earning power.
The old Reed Elsevier has become turbocharged
Nowadays called Relx and in the FTSE 100, it is a British-based success story for data analytics. A link with AI probably explains its current earnings multiple of around 30 despite its blue-chip status.
As with Arm Holdings, however, I like to keep the risk/reward balance firmly in mind. This kind of valuation and chart leave no scope for any disappointment, so I accept missing the boat.
Aim is not necessarily a disaster zone
Cerillion is a fine growth stock in telecoms software that originated 25 years ago as a buy-out of Logica’s customer care and billing side.
Over the past four years it has had a terrific run from 200p to around £16 as earnings soared thanks to fibre broadband and 5G. The company keeps beating expectations but it needs to when its shares trade at about 32 times forecast earnings.
Positive contract news for Beeks Financial Cloud, another Aim-quoted software stock, has prompted a jump of more than 50pc to around 150p, although it is recovering from a downtrend in what has been a sideways-volatile chart since its flotation in 2018.
The company, which serves financial institutions, reminds me of Royalblue, which became Fidessa and was taken over at a big profit for long-term holders, so I will keep an eye on Beeks.
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