There's growth stocks that don't make money and that operate in a sector where everything has to be proven but for which there's a lot of excitation (ex: cannabis stocks).
There's growth stocks that don't make money. Their sales are growing a lot but they don't earn profits (ex: Shopify, not so long ago).
There's growth stocks for which sales are growing or users or consumers, but they don't make a lot of money (ex: Netflix).
There's growth stocks for which sales are growing a lot, such as earnings (ex: Five Below).
All of these kind of stocks are usually selling at a very high PE ratio. You'll be very lucky if you can find one of them at a PE ratio under 25. Actually, some of them don't even have a PE ratio because they don't have earnings. LOL. Isn't it funny?
No, it's not.
I keep a place in my portfolio for some high growth stocks, but it's not a large place. When these stocks disappoint, the reaction of the market is merciless.
It's a question of balance. When you have one of these high PE stocks in your portfolio, you should compensate with a lower PE stock.
Let's take a look at The Trade Desk (TTD): a new stock that's selling for a crazy price (about 100 times 2018's earnings).
- They operate in e-commerce (ad buyers), which is a nice sector;
- The company doesn't carry debt. It's a major pro because if you're looking for a sustainable growth, a large debt would make it much more difficult;
- These last quarters, the company has achieved an incredible growth rate of about 50% each quarter. That's fucking crazy;
- Their return on equity is over 20, which is great for such a young company.
- You need an incredible growth rate to get that stock at an intesting price. Actually, the growth rate should be 100% per year to make it affordable in my opinion (let's see the evolution of the PE with a growth rate of 50%):
- 2018: 100
- 2019: 68
- 2020: 45
- ... You have to look for 2022 to find an attractive PE, which is too far for me;
- Datas about the stock are only avalaible since 2016. It's a major con and only young investors may not pay attention to that very important (lack of) information;
I think that TTD is an interesting stock. But the short track record should be the reason to stay away for a moment. Another way of keeping an eye on it may be to put 1% of your portfolio in that stock and watch how it goes. Or look elsewhere. For instance, you could get Five Below with a PE twice lower and similar EPS growth (but lower sales growth).