It is very easy to pay too much for a 'growth' company. Investors get very excited about how much the business is expected to grow its profits, without thinking as much about how much they're paying for that profit.
Ultimately, it's up to each individual investor to decide how much they are willing to pay, but the market may not be so willing to prop up that excited price. Domino's Pizza Enterprises Ltd. (ASX: DMP) is a good example of this, it's growing profit strongly yet the share price has dropped from $80 in August to today's $59. However it's still trading expensively at 42.2x FY17's estimated earnings.
That's why I think it's important to try to buy growth shares when they're a bit unloved and trading at better value. Here are two great growth shares that I think would make bargain additions to your portfolio at the current prices:
Class Ltd (ASX: CL1)
Class is a software provider for self-managed super fund administrators and it has a market capitalisation of $303 million.
Class shares have declined from $4.15 in September to today's $2.58, which I think is now offering great value. The underlying business is expected to grow strongly over the coming few years as many accountants make the change from desktop to cloud accounting.
It offers great tools and accessibility to all users, which is why it's retaining 99% of its clients each year. This strong retention rate, combined with the rate of change to the cloud resulted in Class growing revenue by 71%, underlying net profit after tax by 71% and the dividend by 67% in FY16.
FY17 will very likely show slower growth than that, but still grow at a good rate. That's why I think Class is good value, trading at 49.6x FY16's earnings with a trailing dividend yield of 1.55% which will soon be fully franked.
Seek Limited (ASX: SEK)
Seek is Australia's largest job portal website, with a market capitalisation of $5 billion.
Its shares are currently trading at $14.61, which is a fair amount less than the $16.98 price in May 2016 and $18.54 in February 2015.
I think now is a good time to buy Seek shares because it's still growing its revenue, profit and dividend well. One of the main drivers of its growth is its growing presence as the job portal leader in multiple countries. It has many avenues of growth for a long time as those countries make the digital change.
Seek could be one of the best growth shares to buy at today's prices, it's trading at 23.6x FY17's estimated earnings with a grossed up dividend yield of 3.91%.
Time to buy?
I think now is a great time to buy shares of both of these businesses, they are both trading at attractive value with decent income prospects too, though Class would be my preferred choice at the current prices. For another great growth stock with a huge dividend yield, you should read this.
