The growth stocks Jun Bei Liu is buying

It's fair to say growth investors have not had a great 2022. But for contrarian investors, those who purposefully go against the market to buy what others are selling (and sell what others are buying), now may just be the time to start bargain hunting. 

Until mid-March, the NASDAQ 100 had fallen around 21% into the red, with higher interest rate fears (and their impact on high PE names) dragging the index down. But since March 14, investors have swarmed high-quality growth names, helping the index rebound by around 16%.

On the local front, it's not too dissimilar. At its worst, the S&P/ASX 200 Growth Index fell around 11%, before changing its trajectory around the same time in March to lift more than 8% higher today. 

But local growth stocks are still trading on the cheap. For example, CSL (ASX: CSL) and Cochlear (ASX: COH) - two of the country's best healthcare names - are still trading around 16% and 13% (respectively) off their highs. 

So while others have been running for the hills, Tribeca Investment Partners' Jun Bei Liu has been adding a few names to her basket. In this video and wire, you'll learn why Liu believes growth stocks could be in for a rebound in the coming months, as well as the stocks she has been buying (and shorting) amid the growth sell-off. 

Note: This interview took place on 29th March 2022. You can watch the video or read an edited transcript below.

Edited transcript 

Could we see a rotation back into growth stocks in the near term? 

Jun Bei Liu: We absolutely will see gyration in the market - the constant shift between value and growth stocks, simply because the market is in transition. It's moving from a very low-interest-rate environment for years and years to a tipping point where we have started seeing higher interest rates. Lots of interest rate increases are being expected in the U.S. and in Australia - we should start seeing interest rate increases in the second half as well. 

So in this sort of environment, we'll see the market constantly gyrating. But it's so important to stay true to bottom-up fundamental stock investing. Investors should find quality companies and wait for the share price to come to a good buying point and put them into their portfolios.

Are you using this weakness in growth stocks as a buying opportunity? 

Looking domestically, our economy is actually doing quite well and it will grow above trend. Our corporates are going to grow at mid to double-digit rates, particularly our resources companies, and while our interest rates are going to be higher, they will still be quite reasonable. And our dividend yield is pretty good. So in this environment, we should be able to see cyclical value companies do reasonably well. 

However, when we take it out a little bit further; when we start thinking about what's going to happen in the U.S. with seven rate rises and what's going to happen in Europe, all of this is going to put pressure on the long term growth outlook for the global economy. 

So if we are taking a 12 month or even two-year view, then you should be able to see that there will be demand back into a lot of those growth companies, because their earnings are underpinned by structural levers, not based on what the economic outlook is.

So for any investor, it is important to be tactical - invest in some cyclical companies, but also future proof your portfolio by investing in companies that will grow beyond just the next 12 months or even 18 months. That's how we approach the current market. 

Which growth companies are you buying right now? 

When we break out what bucket of growth companies you want to invest in over the next little while, it is absolutely the growth companies that have a proven business model. There are market leaders that continue to generate very significant cashflows and these are the areas where you want to take the short term market volatility. 

Things like the healthcare sector, where this sector actually has underperformed for quite some time because of its more expensive valuation. 

Don't forget, this is a sector where companies have proven their growth for decades. These are the true market leaders globally and they have this enormous addressable market and structural growth that is to come.

So these are businesses such as CSL (ASX: CSL) and the likes of Cochlear (ASX: COH). These businesses have such a strong business model and rarely do you see them going for cheap. However, in the last couple of months, we have seen significant buying opportunities and these are the companies you can almost buy and put in the bottom drawer. 

Another component of these businesses that will do well, is that aside from their structural growth components and being market leaders, they have also been hurt by COVID related lockdowns. In the case of CSL where they couldn't collect enough blood to fractionate, and then in the case of Cochlear, there was not enough elective surgery because hospitals were shut or converted to COVID emergency rooms. So on this basis, the earnings not only will grow structurally, they will significantly grow in the next 12 months, just as the economy reopens. 

There has been a sell-off in tech. Are you finding opportunities within this sector? 

There are a lot of opportunities in the market, even in the tech space, where things have been pretty tough. Some share prices have fallen between 50% and 70%. But there are two that we absolutely like. The first is Xero (ASX: XRO). The company was expensive, but its addressable market has been expanding enormously moving from New Zealand and Australia to the UK, where they have demonstrated their ability to take share and now they're moving into the US. And all the underlying stats have shown that they're doing very, very well. 

This company's share price has gone through enormous volatility because of the shift. It's moved from almost $150 back to actually below $100, or around that $100 mark. And it has earnings coming up very soon. So we believe this company, aside from the catalyst, is going to do very well. And it's again, another good bottom draw tech company that you can keep in your portfolio.

Another name is Seek (ASX: SEK). This one is a little bit cheaper on a relative basis. This business is very much linked to the stronger economic cycle and the stronger employment market. The company just delivered over 70% profit growth for the first half and is expecting another double-digit growth result for the next few years to come. Then the share price has underperformed a little bit relative to the market and we think that represents a really good opportunity at this point. 

Where are you finding shorting opportunities? 

For shorting opportunities, we're absolutely looking for the most expensive part of the market, where valuations will be under threat with the amount of interest rate hikes that we're expecting to come through. A lot of these businesses are not profitable and are really based on future expected earnings to come through. 

With that basket of stocks, we are actually seeing not only valuation being derated, but even in terms of their earnings expectations, we are finding it difficult for these businesses to meet lofty expectations that analysts have put out there. So there's a lot of opportunity for shorting.

Accessing the perfect blend

Jun Bei's fund leverages the strengths of both quantitative and fundamental styles of investing by exploiting behavioural biases and identifying high-quality businesses with strong fundamentals. To learn more, click here.