Growth stocks have been firmly out of favour in 2022. And based on the Bank of England’s prediction that we could be in for a punishing and protracted recession, this might continue for some time.
From my Foolish point of view, I see this as an opportunity. Why? Because I remain convinced that the best recipe for building my wealth is to buy stakes in quality companies when they’re on sale and to hold for years rather than months.
Here are two examples that I’ve got my eye on.
Resilient growth stock
Like most UK growth stocks, investment platform provider AJ Bell (LSE: AJB) isn’t having a good year. Its shares have fallen 13%. However, this is actually a lot better than larger rival Hargreaves Lansdown. The FTSE 100 company has seen its value tumble over 40%.
At least some of this is down to the fact that business at AJ Bell has been fairly resilient.
In last month’s update, the company said that customer numbers had climbed 16% in the year to the end of September and now stood at just under 426,000. Although cash inflows were down on FY21, they were still higher than in FY20. Throw in a solid financial position and things really don’t look bad at all.
There’s just one problem with all this.
Right now, AJ Bell stock trades on a fairly punchy forecast price-to-earnings (P/E) ratio of 25. My concern here is that business may suffer as even the keenest private investor prioritises ‘just getting by’ over saving for the future. So, the share price could have further to fall.
Then again, perhaps that valuation can be justified. AJ Bell is still only just over a third of the size of Hargreaves. This arguably means there’s more room for it to grow and take market share from its rival. The introduction of its Dodl app — designed to make investing as simple as possible — is a good example of how this might happen. Another positive for me is that founder Andrew Bell still remains heavily invested, holding just over a fifth of all shares.
A second growth stock I’m bullish on for the next decade and beyond is Kainos (LSE: KNOS).
The Belfast-based IT support services business specialises in helping organisations and governments digitalise their operations.
As dark as the current economic clouds are, I can’t see demand falling for long. That’s if it falls at all. In its last update, management said that trading continued to be “very strong” and that full-year numbers are expected to hit forecasts.
Like AJ Bell, Kainos stock is expensive. In fact, it trades on an even higher PE ratio of 31. So, again, there’s a risk of a near-term paper loss if more investors exit. The shares are already down 31% this year.
Even so, valuations matter less the further I look into the future, assuming the company is able to continue doing all the right things. Put another way, a highly-rated stock that can grow earnings every year for a decade would still turn out to be a better buy than a cheap-as-chips stock that struggles to grow earnings at all.
Based on its track record, I think this could be the case with Kainos.
Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Kainos. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2022