The first half tale of woe for growth stocks is, at this juncture, well-documented. Blame it on rising interest rates, persistent inflation, or geopolitical conflict in Eastern Europe, the bottom line is the first six months of 2022 were miserable for equities, and growth stocks were big reasons why that’s the case.
Growth stocks’ sour showing in the first six months of 2022 may be prompting investors to gloss over exchange traded funds such as the Goldman Sachs Future Tech Leaders Equity ETF (GTEK), but market participants may want to consider an alternative and evaluate beaten up disruptive growth offerings.
“The style score is based on metrics such as growth rates for earnings, sales, book value, and cash flow. It also factors in dividend yields and relative valuations such as the price/projected earnings ratio, price/book, price/sales, and price/cash flow,” wrote Morningstar analyst Lauren Solberg. “Central to growth’s stocks performance in 2022 has been their valuations, which are largely based on expectations for earnings in the future. And those criteria are affected by the level of interest rates.”
As interest rates rise, the future value of growth companies weighs on current share prices. In large part, that explains the weakness endured by GTEK this year. Fortunately, GTEK is actively managed, meaning the fund’s managers can avoid hefty allocations to financially strained, smaller innovative growth firms, which are the primary culprits behind equity market weakness this year.
While GTEK is tech-heavy — the sector accounts for 78.4% of the fund’s weight — it focuses on companies in the sub-$100 billion market cap space, meaning it’s not heavily tilted toward some of the worst mega-cap growth offenders.
“A handful of high-profile growth stocks were responsible for much of the nearly 30% decline in large growth during the second quarter thanks to their heavy weights in the index. The biggest contributors to the fall were Meta Platforms (META) down 27.5%, Amazon (AMZN), off 34.8%, and Snap (SNAP), which plummeted 63.5%,” added Solberg.
Snap is a small GTEK holding, but Amazon and Meta aren’t held by the fund. It could take some time to materialize constructively, but growth stocks, including some in the disruptive camp, are sporting attractive valuations for the first time in a long time. That could pay off for long-term GTEK investors.
“In the wake of the selloff, growth stocks are, on balance, significantly undervalued based on Morningstar fair value estimates,” concluded Solberg.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.