The art of finding, valuing and holding growth stocks (and two to own)

Most investors miss out on big winners; not because they can’t find them - but because they can’t bring themselves to buy them.

I’ve had more than a few growth opportunities slip through my fingers. It’s tough. The best stocks often look too expensive, feel uncomfortable to hold, and only seem obvious after they’ve taken off.

If you’ve ever struggled with finding, valuing, or holding great growth stocks, this is an interview you won’t want to miss.

According to Dushko Bajic, Head of Australian Equities Growth at First Sentier Investors, the best performers aren’t always flashy. They’re “quiet compounders” - businesses that steadily grow while others chase hot trends or get scared off by high P/Es.

“When you can find a long-term compounder that’s gaining market share in a reliable, predictable fashion, you can actually have quite a degree of confidence in your five-year forward forecast," he says.

In this exclusive interview, Bajic shares key lessons from managing over $17 billion in growth portfolios, and explains why great opportunities are often hiding in plain sight.

Key insights

Here are five key insights Bajic shares:

1. High P/Es don’t always mean overvalued

Take Pro Medicus (ASX: PME), a stock Bajic has held since its small-cap days. Despite its triple-digit P/E, his team’s research showed it had only 3% market share in a vastly under-penetrated market. 

That gave them confidence in its multi-year growth runway (and they were right).

"The big turning point there was understanding what the addressable market was for this stock," he says.

That thesis appears to still be stacking up today, with information from AlphaSense showing that industry experts believe PME will continue to gain market share, even from legacy players, by offering reliable, cloud-native solutions.

In our interview, Bajic shares the green flags that helped him look past the high valuation, the proof points that caused him to buy or hold (when others may have sold early), and why he's still backing the company.

2. Your best ideas might be sitting right in front of you

Rather than chasing the latest AI darling, Bajic says some of the best performers are quiet achievers that don't make headlines.

“Sometimes your best stocks are really obvious. They’re sitting there in front of you," he says.

He also shares an example of another standout business he uncovered in the process of his work - not through brilliance, but by paying attention. It was right in front of him, executing well and adding value to its industry, yet largely overlooked.

3. Beware the 'growth trap'

In the same way value investors fall for value traps or income investors for unsustainably high yields, growth investors can be lured by eye-popping valuation upside — without asking why the stock is so cheap.

"Why is it trading at a 50% discount to what it's worth? And quite often it's a business that looks like it's a long-term grower and a compounder, but in fact it's something that it's getting some benefit from a short-term disruption in the market," he says.

4. Keep your research honest

Bajic is wary of teams that fall into an echo chamber. He fosters what he calls “kinetic energy” - a culture of open challenge within his team.

“Research can’t be an echo chamber. You need facts, not opinions,” he says.

He shares key questions to ask, and points out why he prefers to be conservative with any assumptions.

5. Clarify the complexity with a ‘one factor’ model

With a large team and detailed models, Bajic still asks for one thing: simplicity.

“We need to distil the one factor that will make or break the investment thesis for a stock,” he says.

At the end of the day, investors need to make only one of three decisions: buy, hold or sell.

Uncovering world-class companies across the ASX

Dushko and his team actively target Australia’s growth engine – high-quality, growing companies listed on the ASX – to create portfolios with potential to outperform the market. Find out more via the fund profile below or visit the First Sentier Investors website. 

Managed Fund

First Sentier ex-20 Australian Share Fund

Australian Shares

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