This Recovery Is Gonna Make Me Rich

Published in Investing Strategy on 23 March 2010

The economy's struggling but these 5 shares are still growing fast.

Investors today face a dilemma. Although the FTSE 100 is up over 50% from its March 2009 lows, many pundits keep reminding us that shares are cheap, especially when compared to the base rate of 0.5%.

On the other hand, there's still plenty of bad news around, such as the Greek debt crisis and the government's massive budget deficit. It all leaves us wondering whether a stock market correction is just around the corner.

So if you think today is an utterly lousy time to invest, well, I certainly can't blame you.

That Pesky Internet Bubble

Do you remember the Internet bubble? We sure do. When that particular bubble burst in 2000, many saw their portfolio fall directly into the commode -- down 40% in the space of a few months.

See, back in 2000, many people bought reasonable tech stocks but paid way too much for them. The overhyped lastminute.com float and crazy prices for the likes of Sage (LSE: SGE) and Logica (LSE: LOG). And they paid for their mistakes.

But as the market slowly turned around, many people eventually recovered their losses -- and then some.

Of course, the financial crisis and ensuing Great Recession we are facing today is far more widespread and threatening than the Internet bubble was. Nevertheless, over the course of time, investors should have learned that building real wealth consists of three simple, timeless steps:

  • earn as much as you possibly can;
  • save as much as you possibly can from what you earn; and
  • invest those savings.

Living below your financial means is a great way to save money. It might mean living in modest accommodation, driving a slightly older car and forgoing designer labels. It can also mean maintaining your spending habits even as your income increases. That way, you can invest more and more money into the stock market.

You Invested In What?

Ideally, you want to be investing in companies that:

  • have superb management;
  • generate significant free cash flow;
  • grow that cash flow quickly; and
  • trade for cheap prices.

Now Here's The Best Part

It was easy finding great companies that fit this criterion after the Internet bubble burst. But from 2005 to late 2008 it was increasingly difficult finding many high quality growth shares trading cheaply. Until now…

Even after the stock market recovery of the last year, some shares still offer investors the chance to buy good companies on the cheap. Running a share screener in search of growth share bargains, several likely suspects popped right up. I looked for net gearing of less than 60%, a P/E ratio of less than 15, a PEG of less than 1 and a market value of over £40m.

CompanyShare PriceForward P/E
SDL (LSE: SDL)470p13.8
Education Development (LSE: EDD)130p9.2
Micro Focus (LSE: MCRO)503p12.9
Chemring Group (LSE: CHG)3,336p11.9
Mears Group (LSE: MER)295p10.9

One Word Of Warning

Screens like this one can help you to find bargains, but they've got their limits as well. For example, Chemring provides design and manufacture services to the defence industry. If the US or UK governments decided to cut back on some of their countermeasure spend, Chemring might face more than a few medium-term headwinds.

But by and large, growth shares that trade on low forward price to earnings ratios (P/E) are usually quite cheap. And still with so many available to choose from, the time to start looking is now.

If you'd like a little help with weeding out the false positives today, you might want to register your interest in Champion Shares PRO. For now we've closed our member list. But if you'd like to be informed when we announce these changes and to guarantee your exclusive invitation to join us when our doors re-open, simply click here.

More on the economy and the markets:

> Claim your FREE financial guides -- The Motley Fool has teamed up with a number of partners to offer our users free financial guides on topics such as tax planning, funds and much, much more. Click here to download your reports today!

> A version of this article, written by Rich Smith, was originally published on Fool.com, and it was also first published on Fool.co.uk on 25 March 2009. Bruce Jackson has updated it again.

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