It’s a generalisation, but most growth stocks saw their share prices fall in 2022. This is particularly clear looking at the growth-heavy Nasdaq index, which is down 30% over the past 12 months.
Several of these stocks are in my portfolio, and they haven’t performed well. Hence why they’re on my ‘naughty’ list.
But I’m also aware that this growth stock crash presents me with opportunities to buy top-quality shares at knockdown prices.
Why did growth stocks crash?
First, growth stocks in general started to get very expensive in 2021, and this eventually led to a sell-off. That was prompted by a surge in treasury yields which hurt more expensive growth stocks that are valued on expectations for future earnings.
Despite a few small surges, growth stocks are yet to properly recover. One reason for this is the current economic environment, characterised by soaring inflation, higher costs of borrowing and a recessionary environment.
Interest rates are a major factor. Higher borrowing costs increase the cost of growth. In many respects, companies with few debt obligations and plenty of cash are poised to outperform their cash-poor peers.
China conundrum
There are dozens of multi-billion-dollar tech stocks hailing from China. However, Chinese growth stocks generally performed worse than their US peers this year. In many cases, this reflected the impact of Beijing’s zero-Covid policy.
Electric vehicle (EV) manufacturer NIO is a good example. Production growth slowed during the year as lockdowns closed factories and restrictions caused supply chain delays. There’s also evidence that demand started to wane as the year went on.
However, things are changing. China has signalled a relaxation of pandemic restrictions, and this has got me interested.
Despite this, I still have a concern. Modelling suggests that up to one million people in China could die in the coming months as Covid spreads across the state. Will Beijing remain passive or will it reintroduce restrictions? I’m not sure.
I definitely think NIO and its peers such as Li Auto will be good additions to my portfolio. I’m just a little worried that the operating environment for Chinese companies might get worse in the coming months up to the spring before getting better.
NIO and Li are down 63% and 30% over the year respectively. I already own NIO, but I’m willing to buy more. It’s just a matter of when.
Finding opportunity
Growth stocks are harder to value than ‘value stocks’. That’s because I have to make less educated assumptions about future growth. This growth often doesn’t come and stocks fail.
But another company that’s interesting me is biotech and vaccine maker Moderna. As of August, the firm that sold billions of vaccines during the pandemic had $18.1bn in cash. That protects it from higher borrowing costs and allows it to invest in highly promising pipeline projects.
The stock recently jumped amid promising news on its cancer vaccine.
I’m not buying yet. But I’m keeping an eye on Moderna and am tracking one key issue (revenue is plunging as demand for its Covid vaccine wanes) to see how future revenue will play out.
