After a stellar couple of years, growth stocks have been hit hard in 2022. Does this mean that the hype is over? And if so, could this be a good time to start adding them to my portfolio?
Growth headwinds
With few exceptions, growth stocks have struggled in 2022. The most obvious example is Netflix, which has fallen 64% since the start of the year.
Netflix is by no means alone. In the UK, the Ocado share price is 30% lower than it was at the beginning of the year and shares in Rightmove have fallen by 30%. The hype, it seems, is well and truly over for growth stocks.
The reasons for the decline are complicated and unique to each company. But in general, high inflation and rising interest rates have caused problems for growth stocks in both the US and the UK.
Growth stocks usually trade on high multiples of earnings. This means that their attractiveness as investments depends on them being able to increase their earnings significantly in the future.
In the case of Rightmove, the company has a share price of £6.20 and produced 21p in earnings per share. A 21p annual return on a £6.20 investment amounts to a 3% return, which is not huge. But the hope is that Rightmove can increase its earnings and generate a better return over time.
High inflation means that spending is likely to reduce as prices become more expensive. Rising interest rates means that stocks offering low returns become less attractive compared to other opportunities. As a result, growth stocks have had a difficult few months.
Buying growth stocks
With my own portfolio, I try to follow Warren Buffett’s advice and aim to avoid overpaying for investments. But I also try to follow Buffett’s instruction to be greedy when others are fearful. So with growth stocks having declined substantially, I’m looking for opportunities to make investments.
At the moment, I currently own shares of StoneCo and Teladoc in my portfolio. During the pandemic, I think it’s fair to say that both stocks had a fair amount of hype behind them. But at today’s prices, I’m looking at increasing my holdings in both of these companies significantly.
In the UK, I’m keeping a close eye on Rightmove. I’ve wanted to own the stock for some time, but I’ve never felt that the valuation was quite there. I’m getting ready to make a move if the price comes down a bit more.
I’d be happy buying Rightmove anywhere below £5.58 per share. That’s not because I think that’s the lowest the share price will go — I have no idea whether it will reach that level or go lower. It’s because I think that, at that level, the investment return looks attractive to me.
Conclusion
The hype appears to have come out of growth stocks for the time being. And I don’t have a particular reason for thinking that this is going to change any time soon. As I see it, inflation and rising interest rates are likely to last for a while. But I think that this could lead to attractive buying opportunities for me in the near future.
