You may have heard it. You may have read it. And you might even believe — Growth stocks are dead in 2022 as far as concerned! Right? After all, with the unpredictable central bank policy, rising inflation, and supply chain disruptions, it can be challenging to remain convicted in the stock market.
The graph below shows FAANG’s real revenue growth in 2022:
Had you invested in tech stocks, you would have underperformed the market in 2022 BIG TIME. In fact, growth stocks in the U.S. are expected to lag behind the value stocks.
And that brings a huge question mark.
What’s the problem with Growth Investing in 2022?
Hint: Inflation and interest rate hike! Let me explain…
In today’s economy, it is well-known that interest rates directly impact the performance of various investment types. However, many investors seem mainly focused on the effect that this is having on growth stocks. Indeed, this is happening because a large portion of growth stocks value is derived from future earnings growth. This is important since higher interest rates can threaten profitability in specific industries simply by making borrowing more expensive, impacting factors such as cash flow and capital expenditures.
Hence, as the Federal Reserve is expected to raise the rates by 2.25 percentage points by the end of 2022, investors have become much more inclined to seek out lower-risk investment opportunities such as value stocks or dividend stocks.
This makes Growth Stocks Fundamental more crucial than EVER.
Here’s why referring to Jeff Bezos’ tweet:
What does that mean?
As Bill Gurley tweets:
Here’s an example of a tech & growth stock down by 70%:
It’s clear that you should forget about these prices happened. In my view, the most fantastic way to optimize the positioning of a portfolio at this point is to recalculate the risk and identify if the company deserves to be in the “10x club”.
Let me explain further.
In the investment world, the Price/Sales ratio is a popular measure of value for growth stocks to determine whether a stock is overvalued or undervalued compared with its peers by comparing the price of a company’s stock to its revenue. However, the problem with this approach is that some companies have more revenue than others, so the ratio doesn’t provide an apples-to-apples comparison.
In this situation, many experts would lean towards discounted cash flows (DCF) in the finance sector.
Indeed, eight out of ten (8/10) of the free online stock analysis you read uses the P/S ratio to make a comparison and evaluate a growth company since discounted cash flows (DCF) are impossible to be used to predict the company’s long-term cash flow. And that’s where the PROBLEM LIES. I call it lazy valuation.
So, to find the “true drivers of value,” we need to look beyond the P/S ratio or EV/EBITDA and use other valuation metrics.
In the “10x scorecard” as outlined by Bill Gurley, you’ll find below a few ideas to help you understand the key metrics incredible analysts used to analyze what makes a growth company great:
To properly understand the whole meaning behind each metric, I highly suggest you read: All Revenue is Not Created Equal: The Keys to the 10X Revenue Club by Bill Gurley.
As outlined in the metrics above, it is evident that growth investing is still a viable strategy. Ultimately when it comes down to picking the right stock, don’t believe in every hot stock pick you read “online” until you can truly identify and agree that these companies would do well on the “10x scorecard” because fundamentals will eventually matter past the market cycle.
Still confused? Stay tuned for the upcoming article where I will run these “10x scorecard” using Palantir (PLTR) stock as an example. It will be for free!
So there you have it! I hope by now you have a better understanding of growth investing and how to correctly pick a growth stock using the “10x scorecard”. The 10x scorecard is a simple yet powerful tool that allows you to evaluate a company’s potential for long-term success. Ask yourself whether the company fits into it. If the answer is yes, then you have found a company worth investing in. If not, then you should move on to another opportunity.