US Market

Why I’m Buying Growth Stocks Now $QQQ $ARKK

Calvin Lo

Growth and Tech stocks that were all the rage in 2020 have cratered significantly since peaking around Nov/Dec 2021. Since then, the stock prices of many growth stocks especially hyper growth stocks (younger companies which have turbocharged revenue growth rates but were unprofitable or burning cash) have fallen 50-80%.

Some of the worst hit stocks were speculative stocks of companies seen as pandemic beneficiaries (e.g. Peloton, Zoom), SPACs (e.g. Nikola, Grab, SoFi) and meme stocks (e.g. Gamestop, AMC).

Personally, I feel that the sell-off is overdone, at least of some growth stocks. Here are 3 reasons why I’m accumulating shares in beaten-down growth stocks.

Structural trends

I believe that the COVID-19 pandemic has caused structural changes in the world, primarily the acceleration of digitalisation which had already been happening many years prior.

However, the pandemic provided that push (more like a shove) to companies to adopt digital-first practices. As we’ve seen, companies that refused or were unable to digitalise have suffered or even gone out of business altogether.

Going forward, I believe tech companies capitalising on digitalisation trend will continue to benefit, including remote/hybrid work tools, e-commerce (including food delivery), online learning/streaming/payments, cybersecurity, cloud infrastructure, etc.

With increased online activity, cryptocurrencies might also continue to see increased adoption although this asset class is still pretty much in its infancy IMO.

Also, the recent Russia-Ukraine conflict has shone the spotlight on our addiction/dependence on oil and the importance of weaning of it, increasing the case for renewable energy adoption.

Long time horizon

Although I see these structural trends taking shape, these changes will take time in terms of years or even decades. Fortunately, technology adoption and advancement cycles are getting shorter and shorter so we might continue to see technological leaps happening faster and faster.

That said, we need to be super patient when investing in high growth tech (and by tech I refer to the broad term to include tech-enabled industries like EVs, smartphones, etc). Personally, I have time to recover and I’m looking at holding these stocks for at least 10 years or more. In addition, I have many more years of active income I can put towards accumulation in the stock market.

I’m also wary of being in denial by saying that I’m a long-term investor and continue bag-holding some of these stocks that were hyped up in the past 2 years. It’s true that most of these growth stocks that were bid up to insane valuations will probably never see those prices ever again no matter how long the wait. Regrettably, I feel that I should’ve waited to buy in but of course hindsight is 20/20.

So time will tell if some of these growth stocks really do have potential or substance and that their valuations were just pulled forward (and subsequently crashed back to mean), or that they were indeed just overvalued because of market euphoria.

I would be picky though in choosing which ones to continue to hold and accumulate at these lower valuations. Risk-reward prospects might be attractive, but the risks of continued declines are still very real in the face of inflation, interest rates, and recessionary risks.

Valuations

Many of the high-flying stocks back in 2020 are now on sale at much lower valuations. On a high level, one of the first metrics I usually look at for growth is the price-to-sales (P/S) ratio.

For the top 5 holdings in ARKK (which I use as a proxy for high growth stocks), the P/S ratios have dropped to <10. At their peaks, most of them were trading >20 and even 100 in the case of Zoom (ZM).

Source: FinanceCharts.com

In contrast, the P/S ratios of the top 5 stock on the S&P 500 have remained relatively steady. Arguably, P/S is not the best metric to evaluate these mega cap, mature tech companies but just wanted to have a frame of reference.

Source: FinanceCharts.com

Assuming these stocks continue to deliver revenue growth rates of >20% consistently and profitability doesn’t deteriorate substantially in the next few quarters as we exit the pandemic, I would be comfortable accumulating them at these lower valuations.

Closing thoughts

As the saying goes, buy when there’s blood in the streets. But also be very careful of what you’re buying. The past 2 years of euphoria in growth stocks has lifted all boats, even startups with zero revenue. As the tide goes out, we are now seeing who was swimming naked.

If you have been holding onto low quality growth stocks, it’s not too late to get out. But I do feel that now is the time to pick up growth stocks with true potential.

I’m looking for companies building great products that customers love and are in demand, that are still growing revenues post-pandemic, and can show progress towards profitability with scale.

Besides picking individual stocks, there’s also the option of accumulating growth-oriented ETFs (like QQQ or ARKK) on a regular basis, which personally are my preferred vehicles for long term investing.

Follow me on Facebook, Telegram, Twitter and Youtube.

Disclaimer: This is not financial advice. I am not professional financial advisor nor do I work in the finance industry. Anything I write here is purely my personal opinion. Please do your own research and due diligence before investing into anything. All investments come with associated risks. Best to consult a financial advisor if you’re still unsure.

For more investing resources, see my Referrals page.

Disclosure: This post may contain affiliate links and I may get a commission when you click on the links or open an account through the links, at no additional cost to you. I only recommend products or services that I have personally tried and have found useful.

,

2 thoughts on “Why I’m Buying Growth Stocks Now $QQQ $ARKK”

  1. Yeah, I’ve recently put a wad of cash into ARKK for fun. There’s been multi-week positive divergences in the RSI and stochastics.

Comments are closed.