While it is crucial to have a balance between stocks in multiple sectors in a portfolio, focusing on stocks with strong growth prospects tends to pay off in the long run. That's because the market rerates upwards in a very generous fashion those companies that are able to grow their bottom lines at a faster pace than their rivals and the wider index which, for investors, can equate to high levels of profitability.
Of course, things don't always pan out as you'd hoped for with growth stocks. They can miss their forecasts and, if they are rated highly by the market, then their shares can come crashing down to earth. But, provided they have a sufficiently wide margin of safety, growth stocks continue to have appeal.
For example, Newcrest Mining Limited (ASX: NCM) is forecast to post earnings growth of 32.8% per annum during the next two years which, when compared to most of its mining sector peers, would represent a standout performance. Despite this, and even though Newcrest's share price has already risen by 16% this year, its margin of safety is wide, with Newcrest trading on a price to earnings growth (PEG) ratio of only 0.59.
This compares favourably to the ASX's PEG ratio of 1.24 and, with Newcrest having already implemented the 'lean and mean' restructuring drives that many of its mining sector peers are currently focused on, its business appears to be relatively settled and ready to deliver on its upbeat guidance.
Similarly, Domino's Pizza Enterprises Ltd. (ASX: DMP) has an excellent business model that can easily be replicated and expanded in new territories. For example, Domino's is aiming to increase its store footprint across Asia and, with its simple yet effective ordering process, offers and gimmicks (such as driver GPS) holding appeal among its customer base, its economic moat seems to be relatively large.
Therefore, while there is a push towards becoming more health conscious in Australia and across much of Asia, Domino's is expected to increase its earnings at an annualised rate of 28.4% during the next two years. And, with a PEG ratio of 1.87, its shares appear to be good value when you consider the likelihood of Domino's meeting its guidance. In other words, with Domino's having grown its net profit by 16.8% per annum in the last ten years, it seems to be a relatively reliable growth play.
Perhaps surprisingly, Newcrest and Domino's may prove to be less volatile than many growth stocks. That's because they both have betas of 0.8, which means that their share prices should move by 0.8% for every 1% change in the level of the wider index. As such, they could be relatively steady plays should the ASX continue its decline of recent months. This relative stability, together with strong growth prospects and wide margins of safety, means that Newcrest and Domino's seem to be worth buying at the present time.
