It’s easy to get caught up in the latest growth story. Driverless cars, automation and robotics are amazing industries. They’ll change the way we live 10 years from now.
Because they have the potential to generate a growing stream of income, investors don’t mind paying up over the odds for them.
Take Domino’s Pizza Enterprises Ltd [ASX:DMP] as an example. It’s a pizza business like any other. But it’s the way that Domino’s delivers and markets itself that warrants its high share price.
At the start of 2017, Domino’s was trading for around 65-times earnings. Obviously, investors don’t want to wait 65 years to recoup their investment. So you’d assume most, if not all, who bought into Domino’s at the start of the year were expecting earnings to grow.
And they have.
This morning Domino’s released their 2017 annual report.
Revenue from ordinary activities was up 15.4%, to $1.1 billion. Profit from continuing operations also improved 22.2%, to $105 million.
It’s safe to say Domino’s has a business model that works. All they need to do is expand.
Yet the double-digit growth in revenue and profit wasn’t enough for analysts. As reported by The Australian Financial Review:
‘Domino’s Pizza Enterprises’ full-year underlying net profit rose 28.8 per cent to $118.5, falling short of guidance for growth of 32.5 per cent as same-store sales growth failed to meet company targets.’
The stock fell by as much as 14% this morning. But it’s not because Domino’s isn’t a great business. It’s because investors hyped their potential growth.
Let’s look at the opposite situation. Challenger Ltd [ASX:CGF] traded around 22-times earnings at the start of 2017. Not what you’d call cheap, but it’s definitely cheaper than Domino’s.
This morning, the investment and life insurance company also announced their results for FY17. The group delivered record results.
Profits were up 22%, to $399.9 million. The group also increased their dividend payment by almost $15 million. Their results were more or less in line with analysts’ forecasts, leaving the stock unchanged.
But if that wasn’t enough, take a look at how each company has performed throughout 2017.
Source: Google Finance
There’s nothing wrong with investing in growth stocks. Just look at Amazon.com, Inc. [NASDAQ:AMZN] or Alphabet, Inc. [NASDAQ:GOOG]. Had you invested in either company years ago, you definitely wouldn’t be regretting it.
But why not give yourself a better chance at higher returns and invest in what’s cheap, and not what’s hot?
To find more stocks like Challenger, check out what could potentially be the four best stocks trading on the ASX right now.
Junior Analyst, Money Morning