How I’d profit from UK shares in 2020

Growth or value ? Refine your investment philosophy to position your portfolio for superior returns in 2020.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Value or growth? Investors traditionally adopt one as their naturally applied investment philosophy. While the approaches are at odds with one another, both have merit given certain conditions, but let’s explore how you can refine your investment philosophy to position your portfolio for superior returns in 2020.

Growth at any cost…

The typical growth investor is less worried about valuations, if the growth expectations on offer are attractive enough. Many growth shares will trade at high price-to-earnings (P/E) multiples, incorporating future growth expectations. As a result, growth investors continually must weigh up the downside risk of chasing growth at seemingly punchy valuations and the cost of paying upfront for future growth. 

Over the course of 2019, Warhammer founder Games Workshop (LSE:GAW) entered the growth stock category as a high-quality business commanding a premium valuation. Year to date, the business has delivered a total shareholder return of 88% and now trades on a forecast P/E ratio of 24.2 versus a historical 10-year average of 14. Much of the growth is already factored into the existing price, leaving investors with little downside protection.

Is a return to value on the cards?

Value investing is centred around fundamental analysis and securing a bargain price for a sound business. The ‘Sage of Omaha’, Warren Buffett of Berkshire Hathaway is the ultimate champion of value investing. Over the years his approach has been tampered somewhat, as the qualifying criteria becomes harder to apply in the modern economy where intellectual capital is the driving force behind future growth. But I believe as growth stocks begin to fall out of favour, with lofty growth expectations factored into the price, investors will once again return to value.

Adding a dose of reality to punchy valuations…

The key is to be agile enough to use these diverse perspectives to shape our investment thesis. Wouldn’t it be smashing to buy a stock with great growth prospects, at a fair price? Enter the ‘price-to-earnings growth’ ratio (PEG). Jim Slater created this metric to tackle this exact problem. It’s a simple variant of the P/E ratio that takes into consideration the earnings growth prospects of the stock to illustrate its attractiveness.

Strong catalysts put the odds in favour of the house…

As a general rule of thumb, shares with a PEG of less than one and a half present a decent opportunity. Take a look at multi-channel gambling stalwart The Rank Group (LSE:RNK), which currently trades at a PEG of 0.5. The stock possesses some strong catalysts capable of driving an earnings upgrade, with an impressive recently embedded management team focused on acquisitions in the digital space and sensibly trimming the cost base.

Compare this to Games Workshop, trading at a PEG of 2.1. I’m much more comfortable with the risk:reward profile a lower PEG ratio offers. I’m an advocate that a blended philosophy incorporating value and growth means investors don’t have to pay over the odds for growth. 

With valuations stretching beyond historical averages and economic growth stagnating, I see a huge opportunity for investors to capitalise on unloved stocks trading at a discount. We might not be able to find traditional ‘moat’ companies at as deep a discount as Mr. Buffett once did, but opportunities such as the Rank Group have merit as we move into 2020.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Dexter Burt has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

10% dividend growth! 2 FTSE 100 stocks tipped to supercharge cash payouts

These FTSE 100 stocks have strong records of dividend growth. And they're expected to keep on delivering, as Royston Wild…

Read more »

Investing Articles

Down 17% in a month and yielding 7.39%! Is this FTSE 100 share a screaming buy for me?

When Harvey Jones bought Taylor Wimpey last year he thought this FTSE 100 share was a brilliant long-term buy-and-hold. Has…

Read more »

Investing Articles

Here’s how I’m using a £20k ISA to target £11k+ in income 30 years from now

Is it realistic to put £20k in an ISA now and earn over half that amount every year in passive…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

If I could only keep 5 UK stocks from my portfolio I’d save these

Harvey Jones is running through his portfolio of top UK stocks to see which ones he couldn't bear to do…

Read more »

Midnight is celebrated along the River Thames in London with a spectacular and colourful firework display.
Investing Articles

I’m aiming for a million buying unexciting shares!

By investing regularly in long-established, proven and even rather dull businesses, this writer plans to aim for a million. Here's…

Read more »

Investing Articles

3 things to consider before you start investing

Our writer draws on his stock market experience to consider a few vital lessons he would use to start investing…

Read more »

Investing Articles

Will this lesser-known £28bn growth stock be joining the FTSE 100 soon?

As the powers that be plan a reorganisation of Footsie listing rules, this massive under-the-radar growth stock could find its…

Read more »

Investing Articles

Fools wouldn’t touch these 5 FTSE 350 flops with a bargepole – how come I own 3 of them?

Harvey Jones took a chance on three struggling FTSE 350 stocks in the hope that they'd stage a dramatic recovery.…

Read more »