It is hard to escape the conclusion that we are living in economically difficult times. The UK, like many other countries, is in a recession. That means that the economy overall is contracting, not growing. But while the economy may be moving backwards, some individual companies could still be moving forwards. So, might now be a good time to buy growth shares for my portfolio?
Growth shares and the economic cycle
Think back a year or so. Many growth shares, from Apple to Meta, had had a great run. But since then, they have performed poorly. Meta has fallen 62% in the past year alone. Apple has also fallen in that period. At 5%, the decline was modest for the iPhone maker. But it was still a reversal of the growth investors had enjoyed over the previous few years.
Partly that is due to a change in sentiment among investors. A worsening economy threatens to dent consumer spending power. That could lead to fewer opportunities for firms to grow their sales. In response to that, when recession comes, some investors prefer to own shares in companies that operate in industries perceived to have defensive qualities, like supermarkets and makers of basic consumer goods.
But growth is not just about the short term. Investing in growth shares often involves taking a view of how demand for a company’s products or services may be many years from now.
Looking for growth
As an example of that, consider video calling company Zoom.
Over the past year its shares have tumbled 74%. But last year, revenues grew 54% and income more than doubled. Although the company saw a demand surge during pandemic, I think video calling is here to stay in a big way and expect to see continued growth from Zoom in future. It has a well-known brand, large installed customer base and the opportunity to benefit from a growth in remote and hybrid working that often relies on video calling technology.
So, why has the Zoom share price collapsed? Partly it may reflect concerns about whether demand for video calling can keep growing, as well as strong competition from rivals including Microsoft.
But I think the company continues to have promising growth prospects. Its share price today looks more attractive as a potential addition to my portfolio than it did a year ago.
Taking advantage of market falls
Still, I do not plan to add Zoom to my portfolio. Although its share price has fallen to more attractive levels than before, I still find its price-to-earnings ratio of 22 a bit high given the risks to demand growth for the business.
But if the price falls further, I might decide to buy Zoom shares. Recent falls in the price of various growth shares mean that in at least some cases, I now think companies that still have strong growth potential are available at a price I find attractive.
That is why I think now could be a good time to buy growth shares for my portfolio – and I am busy hunting for the right ones.
