Undoubtedly, interest rates have remained low in Australia for the last several months since the RBA announced its first cash rate cut of 25 basis points in June 2019, followed by two more rate cuts last year. Subsequently, the bank reduced it to a record low level of 0.25 per cent in March this year. Amidst the existing coronavirus induced market volatility, any surge in interest rates in the near-term seems unlikely, making placement of funds in a savings account less attractive. In fact, the market is possibly offering a great opportunity to get hold of long-term growth stocks, that can potentially deliver considerably higher growth rate in comparison to the average market growth rate.
To recall, growth stocks are the stocks of the companies that have significant potential to expand in both importance and size within their industries, with higher expected future earnings. However, one cannot forget that such stocks are susceptible to considerable price fluctuations. Investors seeking extraordinary returns over time and who don’t mind taking this potential risk, usually invest in long-term growth stocks.
First, let us discuss what makes growth stocks an attractive investment choice in a low interest rate setting.
Do Growth Stocks Shine in Low Interest Rates?
The low interest rates level in an economy usually set a stage for growth stocks to radiate, by reducing the discount rate of forward profits, consequently raising the net present value or NPV of those future profits.
NPV is one of the most common methods used by investors in order to assess the current or potential investments, as it helps an investor pick a stock that will possibly increase faster than the other stocks in consideration. Simply put, NPV assists in determining the worth of the future profit growth in present. Investors generally considers a stock a good buy if its NPV per share is considerably higher than ongoing market price.
NPV can be calculated as:
(Cash flows in a specific time period)/( 1+r)i, where r is the discount rate and i is the time period.
As it can be derived from the above formula, when discount rate is low amid low interest rates, the long-term growth stocks, which are believed to generate sustainable and substantial positive cash flow, tend to gain. This is similar to the bonds, which become more attractive when the interest rates fall in an economy.
Growth Stocks You May Consider for 2020!
Let’s now take a look at some ASX-listed growth shares that hold significant potential to become top growth stocks for 2020:
EML Payments Limited (ASX:EML)
Payment card technology solutions provider, EML Payments Limited (ASX:EML) seems to hold considerable potential to emerge as a top growth stock in 2020. At the time when COVID-19 spread has shaken the businesses across the globe, the Company generated robust operational cash flows in the January to March 2020 quarter.
The Company held an accrual for about $34.8 million as at the end of February 2020, of which around 76 per cent is likely to be converted into cash over the next one year. The Company further expects to produce incremental revenue in FY21 and beyond as it progresses speedily to sign new contracts and launch new programs.
It is imperative to note that the Company’s stock has delivered a return of over 2,000 per cent in the last ten years. EML closed the trading session ~8.7 per cent higher on 25th March 2020, at $1.445.
NEXTDC Limited (ASX:NXT)
Australian data centre operator, NEXTDC Limited (ASX:NXT) is likely to achieve great strides in the existing buoyant digital scenario with companies turning increasingly towards cloud technology.
Recently, the Company notified that it expects the underlying demand for its premium data centre services to remain robust amidst the current situation of COVID-19 spread. The Company has not recorded any significant impact on its sales pipeline as a result of coronavirus pandemic so far.
Moreover, the Company continues to produce positive operating cash flows, having generated more than $20 million in net operating cashflow in its lately reported half-year financial results for the period ended 31st December 2019.
NEXTDC CEO, Mr Craig Scroggie, recently commented:
NXT, that has produced a return of more than 200 per cent in the last five years, closed the trading session ~2 per cent higher on 25th March 2020, at $7.740.
Charter Hall Group (ASX:CHC)
It’s a known fact that the Australian property market has revived substantially from the situation it was in the same time last year. The recent ABS statistics revealed a significant rise of about 3.9 per cent in property prices (residential) during the 2019 December quarter.
With property market strongly emerging from the downturn, real estate stocks with sound dividend stories can be considered with medium to long term outlook. One such real estate company that can possibly offer higher growth rate to investors over time is Charter Hall Group (ASX:CHC).
As on 25th March 2020, the Company’s available balance sheet liquidity stands at $350 million, while gearing at 2.8 per cent. The liquidity position includes the recently received $148 million final performance fee.
CHC, which generated a return of about 50 per cent in 2019, ended the trading session ~7.8 per cent higher on 25th March 2020, at $6.050.
Though these stocks carry huge potential to outperform the market over the longer time frame, there is no guarantee to the opinion. Investors can possibly adopt a combination of fundamental and technical analysis approach before beefing up their portfolio.
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There is no investor left unperturbed with the ongoing trade conflicts between US-China and the devastating bushfire in Australia.
Are you wondering if the year 2020 might not have taken the right start? Dividend stocks could be the answer to that question.
As interest rates in Australia are already at record low levels, find out which dividend stocks are viewed as the most attractive investment opportunity in the current scenario in our report.