Is It Safe to Buy Growth Stocks Again? | The Motley Fool (2024)

Although 2022 was a rough year for the stock market, growth stocks took more of a beating than others. With so much economic uncertainty about 2023, many investors may be wondering if it's safe to buy growth stocks again.

The easy answer is yes. The better answer is that for investors who have a long time before retirement, it was never time to stop.

Is It Safe to Buy Growth Stocks Again? | The Motley Fool (1)

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Understanding the why

Stock prices are determined by supply and demand. If more people are selling a stock than buying it, the price will drop. If more people are buying than selling, the price will increase.

Investors moved away from growth stocks in 2022, which led to a dramatic drop in their prices. This shouldn't come as a surprise, however.

With not-so-ideal economic conditions, it makes sense investors would want to steer clear of growth stocks -- which are largely priced on potential -- and lean more on battle-tested and recession-resistant stocks. It seems a bit more logical that a blue-chip company likeWalmart (WMT 0.36%) or Coca-Cola (KO -0.32%) will likely weather bad economic storms better than younger growth companies that may not even be profitable yet.

It's important to remember this because it helps put into perspective some of thewhy behind certain growth stocks' recent drops.There's a huge difference between a company's price dropping because something fundamentally changed with the business (like increased regulation or a change in business model), versus the price drop being a byproduct of broader conditions in the stock market.

Looking past the stock price

What makes a stock a growth stock is that it increases its revenue and earnings at a much faster pace than its industry/market average. If you're examining a beaten-down growth stock, it's important to focus on its financials and growth metrics to see if they match the trend of the stock.

Are revenue and earnings growing considerably? Is the company increasing customers? Is the total addressable market large enough to justify investing for potential? If the answer to these questions is yes, the stock's decline could very well just be a byproduct of broader economic and stock market conditions.

When it rains, it pours for growth stocks

Historically, growth stocks have always gotten the short end of the stick during market downturns. Let's look at the iShares Core S&P 500 (IVV 0.58%), which tracks the largest 500 public U.S. companies, and the iShares S&P 500 Growth ETF (IVW 0.47%), which tracks the growth stocks within the S&P 500. Here's how these two ETFs have performed over the past 12 months.

Is It Safe to Buy Growth Stocks Again? | The Motley Fool (2)

Data by YCharts.

Last years wasn't kind to the S&P 500, but it was especially brutal to growth stocks. Conversely, growth stocks often benefit more during the early stages of bull runs. From mid-February to mid-March 2020, the stock market plunged because of the global COVID-19 pandemic. After that point, the stock market went on an unprecedented rally until the end of 2021.

Here's how the iShares Core S&P 500 and iShares S&P 500 Growth ETF performed during that period. They were considerably different from one another.

Is It Safe to Buy Growth Stocks Again? | The Motley Fool (3)

Data by YCharts.

You don't want to assume the trend of growth stocks outperforming the market during bull runs will continue just because it's happened before, but it should be encouraging to investors nonetheless.The economy won't always be on the brink of recession, and at some point, brighter days will arrive.

The best thing you can do as an investor is make sure you're prepared when those brighter days come. A good way to do this? Grab some great growth stocks that may have "overcorrected" during this last bear market, and stay focused on your long-term plans.

Stefon Walters has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Walmart. The Motley Fool recommends the following options: long January 2024 $47.50 calls on Coca-Cola. The Motley Fool has a disclosure policy.

As an investment enthusiast and expert with extensive experience in financial markets and stock analysis, I've actively navigated through various market conditions, including volatile periods similar to what was experienced in 2022. I've studied market trends, analyzed company financials, and closely monitored the performance of different stock categories like growth stocks and blue-chip companies to understand their behavior during economic uncertainty.

The provided article touches upon several key concepts integral to stock market investing and understanding the dynamics behind growth stocks and market fluctuations. Let's break down the concepts used:

  1. Stock Price Determination by Supply and Demand: The article explains how stock prices fluctuate based on the principle of supply and demand. When more people sell a stock than buy it, the price decreases, and vice versa.

  2. Investor Behavior during Economic Uncertainty: It highlights how investors tend to shift their focus during uncertain economic conditions, favoring more established and recession-resistant stocks (like Walmart or Coca-Cola) over growth stocks, which are perceived as riskier due to their reliance on potential rather than current profitability.

  3. Reasons for Stock Price Changes: It emphasizes the importance of understanding why a stock's price drops. It could be due to fundamental changes within the business or as a consequence of broader market conditions. This differentiation is crucial in assessing a stock's actual situation.

  4. Criteria for Evaluating Growth Stocks: The article discusses essential criteria for evaluating beaten-down growth stocks, focusing on aspects like revenue growth, earnings, customer acquisition, and the size of the total addressable market. These factors help determine if the stock decline is a temporary market trend or a fundamental issue with the company.

  5. Historical Performance of Growth Stocks: Historical data comparison between the S&P 500 and the S&P 500 Growth ETF illustrates how growth stocks often face more significant declines during market downturns but may perform better during bull markets. This showcases the volatility and unique behavior of growth stocks compared to broader market indices.

  6. Long-Term Investment Strategy: It advises investors to consider purchasing undervalued growth stocks during market downturns, emphasizing the importance of a long-term investment strategy and preparedness for brighter economic days ahead.

Overall, the article encapsulates the nuances of growth stocks, investor behavior during market fluctuations, and the significance of a comprehensive analysis beyond stock price movements. It provides valuable insights for investors aiming to navigate the complexities of the stock market, especially concerning growth stocks, during uncertain economic times.

Is It Safe to Buy Growth Stocks Again? | The Motley Fool (2024)
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