Stocks are off to an ominous start in 2022 with unprofitable, high-growth, and technology names leading the declines.
Given the depth of recent declines, some investors are likely skittish about embracing growth stocks right now, but the market’s bout of weakness to start 2022 could be opening the door to opportunity with exchange traded funds, including the Invesco QQQ Trust (QQQ) and the Invesco NASDAQ 100 ETF (QQQM).
Both QQQ and QQQM track the Nasdaq-100 (NDX), which is now in correction territory. However, that may be a case of the baby being thrown out with the bathwater because many of the largest NDX components — thereby the largest holdings in QQQ and QQQM — are high-quality, highly profitable companies. Those are exactly the traits investors should be looking when inflation is higher and interest rates are poised to rise.
“I suspect that we will see, yet again, that the profitable, high-[free cash flow] generating names that are deeply rooted in secular transitions to enterprise software, the cloud, digital advertising, and search will once again put up impressive growth numbers…and once again deliver impressive margin expansion in their quarterly reports,” said Greg Branch, founder at Veritas Financial in an interview with Jesse Pound of CNBC.
Some of the biggest holdings in QQQ and QQQM are sporting deep double-digit year-to-date declines. Those include Amazon (NASDAQ:AMZN), Google parent Alphabet (NASDAQ:GOOG), and Meta (NASDAQ:FB). Those stocks, each of which fits the bill as a quality name, combine for over 18% of the Nadaq-100’s weight. Those stocks appear on a CNBC list of Nasdaq equities that recently faltered and are still mostly beloved by sell-side analysts.
“Another Big Tech name on the list is Netflix. The streaming video giant, which saw subscriptions surge during the pandemic, is set to report its latest earnings after the bell on Thursday. Shares of Netflix are more than 26% below their recent high and have slid 14.4% in January alone,” according to CNBC.
Netflix accounts for 1.64% of QQQ and QQQM. Other well-known NDX components that are still favored by analysts that could be prime rebound candidates include PayPal (NASDAQ:PYPL) and semiconductor giant Qualcomm (NASDAQ:QCOM). That duo combines for about 2.8% of QQQ and QQQM.
QQQM is the lower-cost cousin of QQQ, and its annual fee is 0.15% per year compared to the 0.20% charged by QQQ.
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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.