Where’s the bottom for growth stocks?

James Gerrish

Market Matters

Since October the market has been very anti high valuation/ growth stocks which have outperformed for almost a decade and the drum MM has been banging all this time is “don’t expect a decade’s trend to be unwound in just a few weeks” – it’s likely to have much further to go from a relative performance perspective.

However just like a ping pong ball rolling down a staircase, it will have major bounces along the way, especially when we consider stocks like Afterpay Touch (ASX: APT) have already halved in price.

Today we’ve selected 6 growth stocks looking for signs of how they may trade into Christmas, especially looking for good risk/ reward opportunities.  Also the growth names currently appear to be the key to the overall markets sentiment/ direction – MM has regularly quoted that the NASDAQ and Russell 2000 are the leading indices in the US.

The chart below illustrates how the NASDAQ significantly outperformed the Dow from March 2018 but since October we’ve seen a huge reversion and importantly things are now almost back into line.

NASDAQ v Dow Jones Chart

There are no surprising names in the 6 stocks I have selected below but the last few weeks movements have provided excellent set-ups in a couple – time to be “stalking” the trade.

1. Afterpay Touch (ASX:APT) $11.75

APT has corrected over 50% since late August as crazy valuations came down to earth with an inevitable thud, however looking at APT’s valuation will still scare the majority (or it should!)

With the announcement of a potential Senate inquiry into “debt vultures”, payday lenders, lease-to-buy schemes and 'buy now, pay later' providers not covered by the banking royal commission the uncertainty/ volatility around the stock is likely to be ongoing into 2019. A few recent broker downgrades hasn’t helped recently.

MM could consider APT as an aggressive buy below $10.50, or 10% lower.

Afterpay Touch (APT) Chart

2. Appen Ltd (ASX: APX) $11.20

Machine learning business Appen Ltd (APX) fell over 4% yesterday but it didn’t make the bottom 10 worst performers in the ASX200.

We like this particular business but like many in the group it was simply too hot - it’s a global leader in machine learning and artificial intelligence, a very cutting edge sector over the last few years.  While the stock’s now trading on an ok valuation considering its long-term growth potential looking at valuations I think in this sector is fairly futile. These are momentum/ risk stocks and money flow around these names will drive their share prices in the nearer term. Another sharp leg lower and the elastic band of negativity will have stretched too far in our opinion.

MM likes APX into fresh recent lows under $9.60, ideally around $9 – definitely worth watching.

Appen Ltd (APX) Chart

3. Xero (ASX: XRO) $40.05

Cloud accounting and business provider XRO has corrected almost -30% since the end of August but this is a quality business with sustainable growth. I love their product and the longer a user is on board, the more ‘sticky’ their revenue becomes.

The question is obviously what price to pay for this growth, a tumbling NASDAQ is certainly not helping sentiment around the stock – XRO has corrected 30% and the NASDAQ 14.7% over recent weeks.

We like XRO as a business and could consider “nibbling away” around $35.

Xero (XRO) Chart

4. Altium (ASX: ALU) $22.35

ALT develops design automation (EDA) software for Microsoft Windows and has enjoyed consistent growth in revenue over the last 6-years, impressive as its competitors have struggled.

Their goal is to dominate the PCB market (Printed circuit board) and the business is ticking all the correct boxes at present, the only issue was the shares were too expensive as investors chased GARP – “growth at any price”.

The recent 34% correction the stock has certainly helped address these valuation issues.

MM likes ALT below $20 for at least a 20% rally.

Altium (ALU) Chart

5. Cochlear (ASX: COH) $168.02

We put our hand up and bought Cochlear following the Dows 800-point plunge in October, clearly too early in hindsight.

The hearing aid business is undoubtedly top quality but it’s been caught up in the aggressive flight from growth in a greater degree than we anticipated.

MM is looking to exit COH back above $180.

Cochlear (COH) Chart

6. CSL Ltd (ASX: CSL) $187.89

We also purchased CSL following Dow’s 800-point plunge in October, this has proven ok with stock still around our entry levels.

MM is now looking to take profit on this position closer to $200.

CSL Ltd (CSL) Chart


For the first time in many months MM will be bullish growth stocks if we see another leg lower in the coming weeks.

Our favourite 3 at the time of writing are:

1 – Altium (ALU) under $20.

2 – Appen Ltd (APX) below $9.50.

3 – Xero (XRO) around $35.

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Portfolio Manager
Market Matters

James is Portfolio Manager & Primary Author at Market Matters, a daily investment report with over 2500 subscribers that offers real market insight. He is also Senior Portfolio Manager within Shaw and Partners heading up a team that manages...

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