The idea that growth shares can also be cheap seems contradictory. Generally speaking, investors usually pay more today for the prospect of greater gains in the future.
But I believe that’s exactly the case with many brilliant UK-listed businesses right now. I also think it represents a rare opportunity to build serious wealth.
False start
Let’s start with a bit of context. Towards the end of 2023, investors began to get excited. With inflation beginning to fall, many speculated that interest rates would soon be heading in the same direction.
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Such a scenario is usually positive for stocks in general and growth stocks in particular. This is especially true if a firm plans to take on debt to fund expansion since it can be secured at a lower cost.
This helps to partially explain the lovely ‘Santa Rally’ we enjoyed in November and December last year.
The problem is that inflation has been staying higher for longer, meaning that the first cut is unlikely to happen as soon as the market had hoped.
As a Fool, I can argue that this plays right into my hands.
High quality, low prices
Looking around the market, I can see lots of high-quality companies still trading on cheap valuations.
What counts as cheap? My answer might surprise you. Traditionally, something is seen as a bargain if it trades on a low price-to-earnings (P/E) ratio. The issue I have with this is that many of those that do in the UK market are poor-quality businesses, at least in terms of compounding investors’ wealth. Some of our biggest banks spring to mind.
By contrast, I prefer to compare oranges with oranges. This means looking for stocks trading cheaply relative to their average valuation over time. Five years is sufficient for me.
As things stand, this looks to be the case with luxury fashion house Burberry, property website Rightmove, and investment platform AJ Bell.
When confidence returns, discretionary income rises and the next bull market kicks in, these are the shares I want to be holding.
No promises
Now, let me be clear. There’s nothing to say cheap stocks can’t get cheaper. What does the rest of 2024 have in store for investors? My crystal ball is annoyingly foggy.
But here at the Fool, we know how difficult it is to predict the future, buy at the bottom, and sell at the top, at least consistently. So we don’t try.
Instead, we roll with the strategy that simply snapping up great stocks when they’re out of favour can prove very lucrative in time. Because that’s what history has shown us to be true.
A safer bet?
But what if I didn’t want to own specific growth stocks? One alternative is to buy a basket of them via an investment trust. My personal favourite is FTSE 100-listed Scottish Mortgage.
As things stand, the once-coveted fund continues to trade at a discount to net assets. In other words, its shares are undervalued relative to the stakes it holds in various, highly-disruptive companies.
I reckon this state of affairs could quickly reverse in 2024, especially if we see a revival in the number of private firms wanting to go public.
And that’s why I’m intending to buy more for my Stocks and Shares ISA in February.
