Valuations have come down, but stock selectivity is still key in the UK growth market. Forsyth McGar...
Valuations have come down, but stock selectivity is still key in the UK growth market.
Forsyth McGarrity, a director at Threadneedle and manager of the UK Growth fund, remains selective on growth stocks due to several earnings disappointments from companies, largely in the technology, media and telecom sectors.
McGarrity says: "Although valuations have generally fallen, there is differentiation between stocks in the same sector. Logica, for example, is looking better than Telecity, the first quarterly result of which disappointed the market."
As a consequence of this, McGarrity says he is narrowing down the fund's holdings as the portfolio becomes more stock specific. He favours Autonomy, saying it is delivering its business plan and it has a large potential market. Its valuation is high at a P/E of around 300, but McGarrity is relaxed about this because of the company's quality.
McGarrity says very highly rated growth stocks have seen their valuations fall largely because of earnings problems.
He says: "If companies can not deliver their business plans in the short-term, why should we trust in them over the long term? We have seen a number of growth rate disappointments. The shares of telecom company, Thus, have gone from a peak of £8 down to 93p, for example."
In general, McGarrity says growth stocks are trading on a P/E of between 20 and 100 times. IT software has come off its peak, he says, with Logica 35% off its peak valuation and Computacentre some 80% off its valuation high.
David Lis, fund manager of Norwich Union's UK Growth fund, says there is bad sentiment surrounding growth stocks, and the technology sector in particular, but he agrees with McGarrity that if you get the stockpicking right, growth stocks are still a good long term bet.
Lis says there has been a deferral of expectations as far as internet technology is concerned and this has brought valuations down. He says: "The internet is a great medium that has been over-hyped, because there is insufficient bandwidth to make it accessible and easy to use. By July 2001, the asymmetrical digital subscriber line will have been developed to improve the speed of internet access but at £40 a month, this will be expensive technology.
"In the long term, the internet will be great but at the moment there is a catch 22 situation: more highly developed technology is needed to facilitate always-on, unmetered internet access, but, until the price of this technology comes down, this type of access will not see wide consumer acceptance." Lis says the previously high valuations of technology stocks were not sensible because of the slow development of the internet.
Mark Westford, Legg-Mason's UK Growth fund manager, says valuations in the technology, media and telecoms sectors are back to sensible levels after what he terms the "gross over-valuations" of February and March this year.
Westford believes these sectors are likely to see a strong rally as soon as interest rates are seen to be at a definite peak. He predicts this will be at the end of this year or the beginning of 2001.
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