When investing in ASX shares, should you invest in high growth or low p/e businesses?
It's a question that investors have been grappling with ever since the GFC.
You wouldn't win the investing theory award by saying the best thing to do is to buy the most expensive businesses. But it's those high-price, high-growth shares that have done the best year after year with economies failing to fire on all cylinders.
On the ASX we have seen it with tech favourites WiseTech Global Ltd (ASX: WTC), Appen Ltd (ASX: APX) and Altium Limited (ASX: ALU).
Whereas the 'value' end of the market has received no love, even if there has been a bit of profit growth.
The thing is with investment returns is that at the point of comparison – such as June 2019 or August 2019 – it depends on which share is getting the most investor attention. Popularity drives share prices higher (or lower) in the short-term.
If a share is going up then more investors get behind it, re-enforcing the share price increase and supporting their viewpoint. Until the price just gets too frothy.
In this era of low interest rates it's easy to justify the prices of high growth shares, but we still need to be careful. No business is a buy at any price.
There are plenty of shares out there on low price/earnings multiples. But they are probably not cheap on every metric. They may be really capital intensive and require a lot of manufacturing plants or perhaps a large asset base to operate. The return on equity (ROE) or return on assets (ROA) could be low.
It's the businesses that can continue to grow over the long-term, whilst being priced at a good price today, that could be worth buying for our portfolios.
Foolish takeaway
I'd much rather own shares of Altium over Australia and New Zealand Banking Group (ASX: ANZ) or AGL Energy Ltd (ASX: AGL). But the best ones to own could be shares priced cheaply for their future earnings like Webjet Limited (ASX: WEB) and MNF Group Ltd (ASX: MNF).
