We are entering the 10th year of a bull market, with Brexit and a global trade war escalating. So which stocks would you buy today?

We have bought DotDigital and On The Beach in recent weeks. These are both disruptive technology businesses, with strong organic growth and high profit margins.

The tech sector has seen a significant sell of in recent months. The NASDAQ is down 12% since September. We have welcomed this volatility which has presented some buying opportunities.

There is a lot of talk about the valuation of tech stocks, FAANG’s and another Dotcom Bubble. But we are focusing on individual companies which leverage technology to benefit their customers and disrupt traditional business models.

DotDigital is valued on a PE ratio of 22, which appears reasonable for a company that is growing earnings by 26% pa. The company provides marketing automation software. It is expanding internationally and has predictable recurring revenue.

On The Beach is valued on a PE ratio of 16, with earnings growing at 19% pa. Their online only business model allows OTB to provide more flexibility and lower costs to consumers. While traditional travel agents are struggling with high fixed costs, OTB’s asset light model is allowing them to build market share.

The stock market is undoubtedly expensive. The Cyclically Adjusted PE Ratio for the S&P500 stands at 30. Markets have only ever been this expensive in 1930 and 1999. This may or may not predicate an imminent market crash. It does mean that the probability of generating positive returns in the stock market is lower now than it has been in the recent past.

Howard Marks said earlier in 2018 that “the S&P500 has roughly quadrupled, including income, from its low in 2009. It was certainly easier for the p/e ratio to go from low teens in 2011-12 to 25 than it would be for it to double again from here.”

Some investors are rotating out of growth stocks into defensive names. On several occasions recently, the biggest risers on the FTSE100 have been tobacco and utility companies and the biggest fallers are miners and financials. However, taking a very long-term view, we believe that the risk/reward profile is better for quality growth companies than it is for defensives.

We analysed a basket of defensive UK blue chips (including Diageo, Unilever, National Grid). On average this portfolio declined by 29% from 2007 to 2009. The portfolio has generated 110% return in the period from 2009 to 2018.

In comparison a basket of growth companies (including Rightmove, Hargreaves Lansdown, Dominos Pizza) declined by 54% in the financial crisis. They have returned 1037% in the bull market that followed.

We cannot predict where the stock market will go next. We do not know when or if a market crash will happen. But we are happy to run the risk of circa 50% downside in the short term in exchange for 1000% upside in the long term.

Neil Woodford said that “timing a market reversal, or pinpointing a specific event that will trigger it, is not possible but neither is it necessary. It is an inevitable consequence of the way that free financial markets work and have always worked – in the end however, fundamentals always reassert themselves and therefore, they are the only thing matters in the long run.”

So, we will continue to focus on finding great companies. If we can buy a business that has demonstrated consistent double-digit growth with a PEG ratio of less than 1, then we are very happy.