Capital growth stocks excel in good times. Investors are prepared to pay a premium for what they consider to be a bright outlook. But equally, investors can rapidly slash a growth stock’s price if the outlook turns sour, or external events intervene, such as signs of a global recession. It’s therefore incumbent on the investor to look beyond the company’s outlook and factor in the broader economic picture that may favour or hinder a stock’s prospects. Shawn Uldridge, of William Shaw Securities, concludes the worst of the global financial crisis is over and now is the time to take a chance on growth stocks. Risk levels vary in his list of companies, so keeping a close eye on performance, its sector, news flow and the global outlook is essential when investing in growth stocks. While not recommendations to buy, Uldridge offers his reasons as to why investors may unearth some solid capital gains in the short to long term in the absence of a left field event.

Deep Yellow (DYL)

Chart: Share price over the year to 04/03/2011 versus ASX200 (XJO)

Deep Yellow is a uranium explorer with licences and resources based in Namibia. The company’s share price has enjoyed a substantial increase on the back of yellowcake rising from $US41.75 a pound in June 2010 to $US70.31 a pound on March 1, 2011. Increasing demand from China and Russia has been pushing up the price, as uranium is a growing energy source sought by stgeloped and stgeloping economies. Uldridge says as another listed uranium producer Paladin Energy owns 19.9 per cent of Deep Yellow, takeover speculation is never far away. “It could be argued that Deep Yellow is Paladin’s growth and exploration arm,” he says. “Upon listing, Deep Yellow raised $70 million from Paladin investors, with the express instruction of finding and shoring up uranium resources. Deep Yellow has done and continues to do this successfully, and exploration costs are low.” Uldridge says Deep Yellow is trading on an attractive valuation and has a strong shareholder base. Although Deep Yellow is highly speculative, Uldridge expects significant growth as the company stgelops its projects for sale.

Quickstep (QHL)

Chart: Share price over the year to 04/03/2011 versus ASX200 (XJO)

Perth-based Quickstep Holdings recently made the news after signing a long term agreement to supply parts for the Joint Strike Fighter project worth $700 million over 25 years. It’s a significant breakthrough for a company producing third-generation carbon fibre for aircraft applications. “We have been following Quickstep since floating in 2005,” Uldridge says. “This revenue underpins the business for the foreseeable future, and enables the company to bid for further supply contracts. The upside for Quickstep is significant as its technology is patented and the contract win, in our view, confirms the technology is superior to its competitors.”

Asciano (AIO)

Chart: Share price over the year to 04/03/2011 versus ASX200 (XJO)

Uldridge believes Asciano offers a relatively cheap entry point as the market largely ignored it after widespread selling during the global financial crisis. He says Asciano struggled through the GFC under a high levels of debt. But since the 2009 capital raising, the company is continuing to perform much better in response to the commodities boom. “In my client notes, I write frequently about Asciano and would like to re-iterate our confidence in this ports and rail infrastructure play,” Uldridge says. Asciano stock has been mostly flat since August 2009, and Uldridge says it hasn’t been re-rated for the additional traffic flowing through all areas of its business due to increasing commodities production. The company’s latest half year results recently revealed an 8.8 per cent increase in revenue to $1.6 billion. Earnings before interest and tax increased 17.4 per cent to $71 million. “We believe the company has the ability to add significant value to portfolios over the next two years,” he says.

Uldridge suggests investors closely examine management quality before buying growth stocks. As the objective is capital gains rather than dividends, investors are relying on management to unlock earnings potential going forward. The key is to identify undervalued stocks with good businesses behind them, or stgeloping companies with plenty of potential. Uldridge believes the current economic climate provides a good opportunity to consider investing in growth stocks.  “Because of their relatively low yield and usually high levels of gearing, growth stocks were hit hardest during the GFC, and now many are still trading on multiples that imply a continuing low growth rate,” he says. “However, we believe that future growth has been underestimated.”

Woodside Petroleum (WPL)

Chart: Share price over the year to 04/03/2011 versus ASX200 (XJO)

Middle-East tension sent up the crude oil price, with Brent breaching US$100 a barrel, but the rise hasn’t been reflected in Woodside Petroleum’s share price.  Delays and cost over-runs at company projects on top of Royal Dutch Shell selling a third of its holding in Woodside has hurt the company’s share price. “Now is a good time to consider taking advantage of that excess (cheap) stock,” Uldridge says. “The company has invested heavily in new, long duration projects that will underpin production growth for ten years. The production profile for Woodside is one of growth, not stability.” On February 21, 2011, Woodside Petroleum reported a net profit after tax of $US1.575 billion for full-year 2010, a 6.9 per cent increase on the previous year. Annual sales revenue of $US4.193 billion was up 20.2 per cent on 2009, despite a 10.5 per cent fall in sales volumes to 72.2 million barrels of oil equivalent. “In the long term, we expect the oil price to rise, which should result in higher margins for Woodside going forward,” Uldridge says.

BHP Billiton (BHP)

Chart: Share price over the year to 04/03/2011 versus ASX200 (XJO)

The world’s biggest miner BHP Billiton still has plenty of growth left after posting a record half-year profit of $US10.52 billion for the six months to December 31, 2010, up 71.5 per cent on the previous corresponding period. Revenue was up 39 per cent to $US34.166 billion. For what the market widely considers a growth stock, BHP Billiton lifted its interim dividend 10 per cent to US46 cents a share and announced a $US10 billion buyback. A strong balance sheet enables flexibility as the company embarks on an $US80 billion investment program over the next five years. The company says major iron ore and metallurgical coal projects are at advanced stages of the approval process and this should result in a substantial increase in sanctioned project capital expenditure. Uldridge says BHP Billiton didn’t raise capital during the GFC and its $US10 billion buyback will be earnings accretive, while supporting the share price over the medium term. “Most importantly, BHP is trading on a forward EBITDA (earnings before interest, tax depreciation and amortisation) of just five times, so its share price could reach $55 sometime this year,” he says.

News Corporation (NWS)

Chart: Share price over the year to 04/03/2011 versus ASX200 (XJO)

News Corporation’s share price was punished during the GFC in response to a global recession and bleak economic outlook. However, investors who are now optimistic about the global outlook, particularly in the US and Europe, should find value in News Corporation on the back of potentially improving advertising and revenue numbers. Also, in terms of the company outlook, it says something when News Corporation chief executive Rupert Murdoch was last month reportedly buying his own stock. Uldridge says: “Media stocks are being snapped up by savvy, cash-rich investors positioning themselves for the recovery. If you believe in the US long-term, you must believe in the future of News Corporation. Right now, it’s just broken out above a long consolidation phase that could take it well beyond $20 a share.”

Deep Yellow DYL 33 cents
Quickstep Holdings QHL 37.5 cents
Asciano AIO $1.735
Woodside Petroleum WPL $43.18
BHP Billiton BHP $46.55
News Corporation NWS $17.93

Price Current to Market Close, March 4, 2011

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