In this article I’ll reveal two growth stocks I think are brilliant to get a portfolio going. I consider both investments to be low-risk because they both come with security in the valuation. I own both, and I’m considering increasing my positions.
An undervalued big tech company
Investing in big tech can be daunting because the valuations of these companies are usually very high. However, that’s not the case with Alphabet (NASDAQ:GOOG.L)(NASDAQ:GOOG). I consider the shares roughly 20% undervalued based on an advanced valuation method called discounted earnings analysis.
I love Alphabet because it has such a diverse set of technology offerings. Additionally, right now, it’s one of the leaders in the AI arms race. I think the company is managed really well by Sundar Pichai. Here are some of the current highlights that make me confident in Alphabet:
Year-on-year revenue growth of 11.8%
Year-on-year diluted earnings per share growth of 44.9%
Net income margin of 25.9%
That growth is something I’m willing to get behind. I don’t mean that lightly — Alphabet is the second-biggest position in my portfolio. Additionally, its price-to-earnings ratio is just 26.5. Therefore, I’m convinced that I’m getting good value for money. For comparison, Microsoft has a price-to-earnings ratio of 35.5.
An undervalued fantasy entertainment company
I love niche companies that develop products that are unique. I think this sets them apart from the competition in a way that can create enduring success if executed properly. It’s much more difficult to retain your customers if there are a lot of other businesses doing the same thing as you. Games Workshop (LSE:GAW) has developed a niche in highly creative tabletop games that fans adore.
I love that some of the company’s customers have been with it for over 30 years. Additionally, management has expressed that it is in the business for the long term. It says that there might be periods of low growth and high growth, but they are committed to long-term survival and success. To me, this frankness about the reality of the business bodes well for lifelong Games Workshop shareholders, which I have an ambition of being.
Here are some of the current highlights which reinforce my belief in the investment:
Year-on-year revenue growth of 14.5%
Year-on-year diluted earnings per share growth of 12.5%
Net income margin of 28.4%
Games Workshop shares have provided a sense of stability in my portfolio, which has a heavy technology emphasis. Its price-to-earnings ratio is just 23.5, and I think the market has significantly undervalued it based on my discounted cash flow analysis. Therefore, I’m a confident shareholder.
Here’s why I own just 10 stocks
I support diversification, but my portfolio is quite concentrated. When people have been investing for a long time, they start to understand the nuances of each opportunity better. This benefit has allowed me to practise an 80/20 analysis on my portfolio. Basically, which 20% of my investments produce 80% of the best results? Over time, I increase those positions and reduce or eliminate the others. That helps keep my returns competitive.
I have never considered Alphabet and Games Workshop worthy of being cut from my holdings. I can’t see that changing any time soon.
The post 29% of my portfolio is in these 2 undervalued growth stocks appeared first on The Motley Fool UK.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Oliver Rodzianko has positions in Alphabet and Games Workshop Group Plc. The Motley Fool UK has recommended Alphabet, Games Workshop Group Plc, and Microsoft. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
