I’m not ashamed to say that I’ve been a bit of a growth share sceptic over the years. When building an investment portfolio, there are three main buckets to choose from — income, value, and growth. So I have found myself often going for opportunities within the first two buckets and neglecting my growth allocation.
Growth investing
My approach was mainly due to the apparent simplicity of selecting value and income opportunities, especially in contrast to the complexity of successful growth investing. What makes a good value or income investment is often clear-cut and can be seen by looking at underlying fundamentals. On the other hand, a growth investment requires faith. I have to hope that the company’s performance will catch up and exceed the current share price.
Consequently, finding the right opportunity within the growth sphere can take time and effort. This sector is known for having much higher price-to-earnings (P/E) ratios, a lack of stable income, and sometimes an absence of profitability. Despite this, I can identify promising opportunities with strong underlying fundamentals by using a growth investing filter.
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A prime example of what I am after is RELX (LSE: REL), a UK information and analytics business. The share price has performed surprisingly well following the pandemic. It gained 34% in 2021 and is down just 2.6% this year. Furthermore, the company has grown almost 300% in the last 10 years, consistently expanding each year.
Growth characteristics
When looking at analyst forecasts for RELX, it is clear why it would be considered a growth company. Turnover is forecast to rise by 16.9%, and underlying profit is set to increase by nearly 43%. This level of growth far exceeds the roughly 5%-10% generally associated with a value investment. Furthermore, earnings per share (EPS) have grown by 13% on average every year for the last decade, a very impressive level.
In addition to these core growth characteristics, the company has a set of very strong fundamentals. Profit margins are high, debt levels low, and the company is achieving significant cash flow generation above its three-year average. And RELX has significant efficiency in generating income from invested capital, a good indicator of quality.
However, it is trading at a P/E ratio of over 26, making it quite expensive in the current market. This could lead to the share price contracting further, as it is potentially overvalued. Additionally, growth has been slowing over the last few years, so the 13% average may not be achievable going forward.
Despite this, RELX has very encouraging underlying fundamentals and is a growth company I would be keen to invest in. Therefore I will watch the share and aim to add it to my portfolio going into 2023.
