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Over the long term, growth stocks have outperformed value shares. The key to getting good returns, though, is finding ways to buy them when investors are looking elsewhere.
I think it’s fair to say the stock market now has its eyes firmly set on Rolls-Royce shares. But what are the names that have fallen out of fashion despite long-term growth prospects?
Bunzl
FTSE 100 distributor Bunzl (LSE:BNZL) has had quite the fall. The firm is a distributor of non-food consumables and it’s been having some difficulties with its US business recently.
A weak macroeconomic environment and some execution errors have resulted in the stock falling 33% this year. And there’s a risk the difficult trading conditions might continue.
The company, however, has a strong record when it comes to growth. It’s been a prolific acquirer and a fragmented market should mean opportunities going forward.
Every new acquisition boosts Bunzl’s revenues while removing a competitor. And at a price-to-earnings (P/E) ratio of 15, I’m looking to buy it before the firm’s update next month.
Wise
Wise (LSE:WISE) is another UK stock that I think investors systematically underestimate. I’m hugely impressed by the way the payment processor goes about its business.
As an example, the firm’s take rate – the amount it claims as a fee for processing transactions – has fallen from 0.67% in 2024 to 0.52%. But this just makes the firm harder to compete with.
Facilitating cross-border transactions means the risk of foreign exchange fluctuations is real. And this can have a bigger effect on profits than it would with a different company.
For the time being, though, the firm is growing its users, payment volumes, and revenues as a result. So with the stock down 15% since the start of the year, it’s definitely one to consider.
Brown & Brown
Outside the UK, Brown & Brown (NYSE:BRO) shares are down 31% in the last six months. This is due to a combination of a big acquisition and a weak insurance market.
The company funded its deal for Accession – a rival firm – by increasing its outstanding share count by almost 14% and raising the same amount in debt. That makes the move risky.
Brown & Brown, however, has a terrific record of integrating new businesses. And the company issued stock at an EBITDA multiple of 19 to buy Accession at a multiple of 16.5.
Using a higher-priced stock to buy a lower-priced one creates an immediate boost to profits. So this could turn out to be a smart move and I’m buying the stock as a result.
Opportunities?
Investors hoping to find the next Rolls-Royce should be looking for stocks that have fallen out of favour recently. And the obvious candidates are software-as-a-service companies.
I’m wary about the threat of AI disruption for these businesses, so I’m generally staying away. But UK investors don’t have to look far to find other growth stocks that are out of fashion.
From there, it’s about being willing to consider buying when others don’t want to. And the story of Rolls-Royce in recent years shows us what can happen when things go well.
