Growth stocks have had quite a rough ride over the last few years. With inflation plaguing the economy, most of these businesses have suffered disruptions to revenue and earnings. And, subsequently, investors growing increasingly fearful have sent share prices tumbling into the gutter.
But that appears to be finally changing. The latest inflation figures show that we’re just a few basis points away from reaching the Bank of England’s target of 2%. And providing this trend continues, that means interest rate cuts are likely just around the corner.
For businesses, that means debt’s going to get significantly cheaper. But more excitingly, it also means that mortgage owners are going to enjoy a long-awaited relief. With less money being gobbled up each month, household budgets are going to rise and, given sufficient time, I’d expect to see consumer spending ramp up again.
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This anticipation already appears to be starting to materialise in the stock market. Both the FTSE 100 and FTSE 250 are climbing firmly ahead of their average pace. And analyst forecasts suggest that this momentum may continue firmly into 2025 and beyond.
In other words, we might be standing at the edge of a new bull market. And if it’s anything like the last one, it could extend well beyond the next decade. That’s why I believe 2024’s going to be a pivotal moment for countless investment portfolios across the country.
Potentially explosive returns
There were a lot of winners in the last bull run. But among them, Ashtead Group (LSE:AHT) stands out. Between 2009 and 2021, the equipment rental business saw its market capitalisation skyrocket by over 7,600%. That’s the equivalent of a 40% average annualised return – more than double what Warren Buffett typically earns. To put this into perspective, an initial £10,000 investment grew to be worth around £770,000!
Today, Ashtead continues to look like a top-notch business. Its international expansion’s proving to be a resounding success, and management’s consistently maintained its operating margins, indicating prudent capital allocation. However, the opportunity for explosive growth, like we’ve seen in the past, is most likely over. After all, the firm’s now worth just shy of £25bn. That means to deliver another 7,600% gain, the market-cap would need to reach close to £2trn.
Needless to say, that doesn’t seem likely over the next decade. But it goes to show the potentially explosive returns investors can reap by snapping up growth stocks at the start of a new bull market.
Of course, there were plenty of other growth stocks that didn’t fare as well as Ashtead. Some faded into obscurity, while others collapsed or were snapped up by opportunistic private equity firms. Therefore, simply throwing money into random growth stocks and hoping for the best isn’t prudent investing.
No-one could have predicted the success of Ashtead at the time. But there were early signs of potential from a widening competitive moat to disciplined and experienced management. And investors should be on the lookout for both of these traits when diversifying across the UK’s growth stock universe.
