Investing in fast growing companies has been a profitable strategy in recent years. With investors feeling bullish and looking for stocks with the ability to re-rate quickly, dynamic small- and mid-cap firms have found themselves in favour. As a result, the valuations of some of these stocks have been rising rapidly, too.
These circumstances have made it trickier to find growth companies trading at valuations that won’t send most investors reeling. Stockopedia’s tracking of screens that look for earnings growth in shares with reasonable prices shows that many have struggled to find ideas over the past year.
When it comes to this dearth of ideas, there have been two headwinds. One is that the valuations of popular growth stocks have soared in places - so they no longer pass muster as classic “growth at a reasonable price” shares.
Another is that “GARP” strategies generally look for shares with positive relative price strength. Usually, that means they’re hunting for shares that are trading ahead of the market on a six to 12 month basis. Given that prices cratered pretty much a year ago - which hit many growth stocks quite badly - it’s no wonder that GARP strategies have been on the ropes ever since. But things are starting to change.
This week a year ago, the market bottomed and started a steady recovery. While it’s not quite back to where it was - the FTSE All Share is still down by around 7% on where it was before prices started to collapse in February 2020 - we’ve nonetheless had 12 months of reasonable momentum. Every day that now passes is putting more distance between us and the market collapse of 12 months ago. Relative price strength measures are improving all the time. So there’s a case to think that GARP strategies will continue to get better traction from here.
Indeed, while growth strategies have had a tough 12 months, they are up among the best performers over the past three months - and the numbers of stocks passing the screens is rising as well.
This chart of a Growth at a Reasonable Price strategy shows just how well it was performing in the 18 months prior to Covid hitting the UK - and just how badly it was affected when it did. It also shows a solid recovery since - and the good…
