3 growth stocks tipped to perform

Growth investors shouldn’t be scared off in 2021, with plenty of upside remaining for large swathes of the Australian equity universe despite share prices hitting historic highs, says T. Rowe Price's Randal Jenneke.

In the US, the S&P 500 ended 2020 at record levels, up more than 16% over the year while the tech-powered Nasdaq was up an eye-watering 43%. And in Australia, the price-to-earnings multiple, across both one and two years, is still at multi-decade highs.

“The first response to that is typically one of concern because generally higher multiples mean that going forward, returns are going to be lower,” says Jenneke, T. Rowe Price's head of Australian equities.

“But I’d say that’s not likely to be the case right now. Into 2021 and 2022, we’re going to get a strong cyclical recovery both in growth and in earnings, so from our perspective, we think current multiples on the high side are justified.”

And while 2020 was the year of government stimulus, investment returns this year will hinge on companies’ ability to deliver earnings.

During an online presentation this week, Jenneke also discussed the much-lauded rotation into value stocks, which kicked into gear once COVID-19 vaccines were announced. This saw the Russell 1000 Value Index rise by 13.2 per cent in November 2020, outperforming the Russell 1000 Growth Index, which only registered a 10.1 per cent rise for the month.

“We think the value rally we’ve seen is going to peter out, and that it’s the cyclical growth names that are going to outperform going forward,” Jenneke says.

This is underpinned by his view that the parts of the market that have bounced hardest during the value rotation face long-term structural headwinds, with energy a key example.

“If you think about the future of energy, it’s around electrification, not oil and gas.”

What’s the outlook for 2021?

Jenneke and his team see a strong recovery in the local economy and in Australian company earnings this year. They expect GDP growth of around 4 to 5% going forward, slowing a little into 2022 in what should be “a good story for domestic cyclicals.”

“We’ve been surprised so far by the ability of companies to grow earnings, despite the fact they’re starting to cycle some high rates of growth from the previous 12 months, but we think there’s still upside to come,” he says.

“We also think that the COVID-19 recovery story – all those businesses that were shut down at various points in 2020 - are some of those that are going to perform well this year. And that’s because as the vaccine rollout progresses, they’ll get back to normal.”

T. Rowe Price’s Australian equities portfolio is divided into four key categories of:

• Defensive growth
• Cyclical growth
• Extreme growth
• Recovery.

The manager's Australian equities strategy has been taking profit on its defensive and extreme growth buckets and putting more capital into some of the names in the cyclical growth and recovery categories.

Automotive is one area it tips to perform well in the environment of strong cyclical growth. This is a sector that has lagged in recent years amid decreasing consumer confidence, lower levels of household wealth and been knocked by regulatory changes including some spurred by the banking royal commission.

“There’s going to be a structural change in how new cars are sold in this country, so looking at ways to play this improving cyclical strength, one company that stands out is Eagers Automotive (ASX: APE), the leading automotive dealer in the Australian market,” Jenneke says.

He believes Eagers will be a major beneficiary of the limited vehicle supply that resulted from long periods of automotive production shutdowns in 2020: “This limited supply is fantastic for a dealership model because it means there’s less discounting and margins are higher.”

Jenneke expects the company will capitalise on the clear shift in the way new cars are sold. “The old model of having a car yard on every main street and pumping volume through it doesn’t work,” he says.

The low penetration levels of car financing within automotive dealerships also represents a largely untapped revenue stream for companies like Eagers, which Jenneke believes can increase that side of the business.

Healthcare is another area in Australia where T. Rowe Price sees opportunity, but only on a very selective basis. “For the first time in a number of years, we’re seeing some of the major stocks facing some headwinds,” Jenneke says.

Private hospital operator Ramsay Health Care (ASX: RHC) is one of his preferred names in the sector, which he believes will benefit as hospital treatments normalise post-COVID.

“Some of the more global names have issues with growing competition, currency values, and regulatory risks linked to the new administration in the US,” Jenneke says.

“It’s a sector that has historically generated very good returns for us, but we’re a bit more cautious in 2021.”

He’s also optimistic about some areas of listed infrastructure, naming toll roads operator Transurban (ASX: TCL) as a company he expects to do well. This is largely because it was hit so hard during the worst of the pandemic, particularly in some of its largest arterial roads on the east coast of Australia where traffic plummeted during stay-at-home orders.

"As the vaccine gets rolled out, it’s going to do well,” says Jenneke.

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