The Nasdaq has been one of the worst-performing stock markets globally over the past year. In fact, the index is down a huge 33%, meaning more than $5trn has been wiped off the growth- and tech-focused index.
Like many investors, I was wary of US-listed growth stocks in 2021 as valuations soared. And that strategy paid off. However, with valuations looking more attractive, I’m looking to see whether I can take advantage of the Nasdaq correction.
Downward pressure on growth
Growth stocks, in general, became very expensive in 2021. And this, combined with a surge in US treasury yields, led to a sell-off which hurt growth and tech stocks, which are valued on future earnings more than other parts of the part.
However, the macroeconomic environment has remained challenging for growth stocks in 2022. We’re now seeing a contraction in economic activity around the world, which will likely lead to recessions in many countries, and this is already hurting some of the biggest growth stocks. Amazon and Meta have tanked over the last month. So have hard techs Tesla and NIO.
Healthier valuations
Growth stocks were trading with huge multiples. But now valuations are looking a lot more attractive, although that does, in part, reflect the darkening economic climate.
For example, Li Auto now trades with a price-to-sales (P/S) ratio of three — that’s just a fraction of what it was last year. A year ago, Amazon had a P/S ratio of four, while today’s ratio is just 1.7 — the metric is calculated by taking a company’s market capitalisation and dividing it by the company’s total sales or revenue over the past 12 months.
Exchange rate issues
Despite a worsening economic climate, I do think now is a good time to invest in carefully-picked growth stocks. However, there is another challenge. And that’s the exchange rate.
The pound is currently worth $1.14. That’s down hugely on this time last year — around 20%. And this means buying US stock is more expensive than it used to be — assuming share prices remained constant. It’s also problematic because if the pound appreciates — and in the long run I expect that to happen — it could wipe out my gains.
What am I buying?
The correction clearly presents opportunities despite the challenges relating to the exchange rate and an unfavourable economic outlook. I’m looking more at hard tech rather than soft tech.
I think the Chinese EV manufactures, including Li Auto, have fallen far enough. This Nasdaq-listed stock also has another challenge, and that’s Covid-induced lockdowns, but these can’t last forever, surely. Li might become the second EV producer to turn a profit, after Tesla. That’s why I’m buying.
I’m also keeping a close eye on Novavax. The biotech is down 88% over the year, and even more from its peak. However, it has a forward P/S ratio of less than one, and the Covid-related revenues should boost new product development.
