Category Archives: Growth Investing

Are High Return Investments Too Good to be True?

Who doesn’t want high returns on their investments? However, when something sounds too good to be true, it probably is. More specifically, when certain stocks deliver excellent returns, ask yourself what’s the risk behind them.

coins stacking higher and higher with plant behind each stack indicating growth of money

Here are some examples.

High Return Tech Stocks

Shopify (TSX:SHOP)(NYSE:SHOP) has got to be one of the highest return tech stocks out there. Here’s a chart that shows its total returns since inception compared to other big tech names.

Yes, Shopify stock kicked the butts of the FANG stocks, Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX), and Alphabet (NASDAQ:GOOGL)(NASDAQ:GOOG).

SHOP Chart

SHOP data by YCharts

However, Shopify’s valuation is super duper expensive. At about US$200 per share, it trades at a blended P/E of about 500 and a PEG ratio of about 20.

Compare that to:

  • Facebook’s P/E of about 23.2 and a PEG ratio of about 1.5 at US$175 per share,
  • Amazon’s P/E of about 83.6 and a PEG ratio of roughly 1.4-2.8 at US$1850 per share,
  • Netflix’s P/E of about 120 and a PEG ratio of 2.4-3.9 at US$361 per share, and
  • Alphabet’s P/E of about 27.3 and a PEG ratio of 1.5-1.9 at US$1208 per share for GOOGL.

Surely, Shopify is growing at a super fast rate. For example, revenue growth was 59% in 2018. However, because of its astronomical valuation, it’s especially subject to an especially huge drawdown when we experience a market meltdown.

By the way, I don’t categorize the little correction we had from October to December 2018 as a market meltdown. In that period, Shopify fell from a high of about US$168 to a low of about US$120 for a drop of 28%. Imagine what a real market meltdown can do to Shopify stock (at least in the short term).

Biotech Stocks

Biotech stocks did very well for a long time. The long-term price chart of iShares NASDAQ Biotechnology Index (NASDAQ:IBB) illustrates the big picture.

Source: Google Finance with author annotatio
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This Growth Stock is Priced at a Tremendous Discount

Summary

  • Brookfield Business Partners has +30 years of proven track record in investing and managing businesses on a global basis.
  • It aims for returns of 15-20%.
  • Buying the stock on big corrections can lead to even higher returns for you.
  • The risks lie in the strong reliance on management competency and the limited partnership having volatile earnings/cash flows from buying and selling businesses. This makes it very difficult to value the stock.

What Does BBU Do?

Brookfield Business Partners LP (TSX:BBU.UN)(NYSE:BBU) acquires high-quality businesses that are either market leaders or are businesses that it can improve on by applying its global investing and operational expertise.

Ultimately, BBU believes that the businesses that it acquires will generate strong cash flow — if not now, then in the future (after it improves the operations). When a business has maximized its value, BBU would sell it and redeploy the proceeds in better opportunities for higher returns.

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How to Build a Position in Your Favorite Stocks

This article with an additional example using Tencent (OTCMKTS:TCEHY) first appeared in the Seeking Alpha Marketplace service DGI Across North America.

Have you ever missed out on high-flying winners? Have you ever been stuck in a (seemingly) losing stock for a long time? I’ll use Amazon.com (NASDAQ:AMZN) and CVS Health (NYSE:CVS) as examples for illustration.

person with a question

How to Build a Position in Your Favorite High-Flying Winner

An investment in Amazon 10 years ago has become a 24-bagger. In other words, it delivered returns of roughly 37.5% per year. That said, we’ve been in a bull market since 2009.

In a correction, it’s possible that Amazon stock could fall 30-50%. In a normal market though, one of the best ways to build a position in a high-flying stock like Amazon is buying it periodically.

Some investors wait to buy stocks on dips. However, you’ll notice that in the last few years, dips in Amazon stock didn’t occur very often.

chart showing dips of Amazon stock between 2016 and 2018

Source: Google Finance with author annotation – Potential buy points when using the “buying on dips” strategy

If you waited for a dip in Amazon stock in June 2017, you wouldn’t have gotten one until April 2018. However, by then, the stock had already appreciated +40%.

At this point in the cycle, I’m leaning more towards buying high-flying stocks on a correction, whenever it may occur. Share in the comments below if you have a different opinion.

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