I think growth stocks can be great investments for tough times. Companies that can keep increasing their earnings through difficult economic conditions are highly valuable.
With a potentially challenging year coming up in 2024, I’m setting my sights on growth stocks in December. And two in particular stand out to me.
Berkshire Hathaway
Berkshire Hathaway (NYSE:BRK.B) is sort of cross between a growth stock and a value stock. The company is relentlessly focused on increasing earnings per share, but the stock isn’t wildly expensive at today’s prices.
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I think that means investors get the best of both worlds – a company that is likely to be worth more in future than it is today at a price that means there’s a decent chance of a good return. That’s an attractive combination for me.
Berkshire aims to generate growth through a combination of investments – into existing businesses as well as to acquire new ones – and share buybacks. This combination has pushed the stock up 75% over the last five years.
One risk that the company itself acknowledges is its reliance on Warren Buffett. Following the loss of Charlie Munger earlier this week, this risk has probably increased.
The firm also notes, though, that it has a plan in place to manage the effect of Buffett becoming unavailable (for whatever reason). And the diversified and decentralised nature of its operations further help limit this risk.
Otherwise, Berkshire’s strong balance sheet mean it’s highly unlikely to get into financial trouble. And its size allows it to take advantage of opportunities that aren’t available to smaller businesses.
Moving forward, I expect the company’s growth to be steady, rather than spectacular. But I also think it’s going to be highly reliable, which is what I look for in a stock to buy.
Halma
Halma (LSE:HLMA) is a much more traditional growth stock. It grows much more quickly than Berkshire Hathaway, but also trades at a higher price-to-earnings (P/E) multiple.
The company’s main strategies involve acquiring other businesses and helping them operate more efficiently. And it has a good track record of doing this, having grown revenues at an average of 10% per year for the last decade.
Earlier this year, a combination of supply chain issues and inventory levels caused the company’s cash conversion ratio to waver. This sent the Halma share price lower and it’s still below where it was at the beginning of January.
The most recent news, however, is much more encouraging. Last month’s update indicated that cash conversion had returned to its previous – extremely impressive – 96% levels.
Halma’s strategy of growth by acquisition can be risky. There’s a constant pressure to find new opportunities and an inherent danger of overpaying for a business, leading to poor returns.
With a market cap of around £8bn, though, the firm is unlikely to find itself short of opportunities any time soon. And the business has shown itself to be disciplined in its strategy in the past.
At a P/E ratio of 34, Halma shares don’t look cheap. But I think the company has a good chance to grow into its valuation, which is why I’m looking to buy the stock before it gets back to where it was at the start of the year.
