Should I completely avoid growth shares this year?
‘Growth shares’ are those stocks of companies that are expected to grow their revenues and profits at a faster pace than the market. While they can be found in any field, most are in innovation-focused industries like technology.
Such stocks have been the biggest drivers of global investment returns over the past decade and more. Think Tesla, Meta Platforms and Amazon. The returns these stocks have generated for shareholders over the years is astounding.
Growth shares vs value
However, last year, value was in while growth was out. Rising rates pushed me to re-evaluate future profits at the fast-growing tech stocks. I felt many companies were seriously overvalued. A sell-off ensued, as investors like me rushed to safer defensive stocks. So now I’m asking myself, should I avoid growth shares altogether this year and buy value shares instead?
In contrast to fast-growing stocks, value shares tend to remain steady through all sorts of market conditions. They take time to gain in price, but some that are out of favour can provide me with the opportunity to snap up good investments that are undervalued.
Harsh climate for growth
They look more attractive than growth shares at the moment because of these uncertain times and rising interest rates. You see growth stocks benefited from an era of cheap borrowing and modest inflation during the last decade. They could fund their growth with cheap borrowing. The party stopped in 2022 as central banks began an aggressive cycle of interest rate hikes to combat record inflation. The Bank of England’s Monetary Policy Committee doesn’t intend to change course until its target of 2% is within reach, for instance. I don’t foresee that happening within the next two years, and prolonged central bank tightening isn’t ideal for growth stock valuations.
Regardless of this, I understand that diversification is important. I don’t think I should only focus on defensive sectors that can weather the near-term economic outlook. Not only that, but growth shares have been performing better than I expected this year. Thus, it’s important for me to be exposed as much to sectors like technology and biotech, as I am to value sectors like financials and utilities.
Certainly, cheaper value stocks are still more attractive over the long term. But it’s not the time for me to neglect growth, particularly if such stocks continue to rebound after a tough 2022.
For example, Tesla’s share price has recovered by 77% year to date. Not many stock market companies will perform as well as that for the whole of 2023, even though its valuation still looks toppy following its prior meteoric rise.
Regardless, it’s a splendid example of a consistently profitable growth stock. The expectation of consistent profitability should reduce my risks in buying some growth shares.
So what conclusion have I reached? After the Silicon Valley Bank debacle, the picture for tech doesn’t look pretty at all. Growth shares aren’t at the top of my wish list this year. But I don’t intend to give them cold shoulder. I’ll consider those that are profitable and deeply undervalued — a sort of growth-meets-value strategy!
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Henry Adefope has no position in any of the shares mentioned. 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 2023