So if you have been watching the market since the beginning of the year, it is clear that value has been rewarded while growth has been whacked down quite a bit.
Take a look at stocks that we’re glorified in 2020 such as Snowflake.
Or even Palantir…
You could go across many different names/companies, but I just want to talk about investing psychology just for a little bit.
What we saw in 2020 was kind of nutty and if you are a newer investor it seemed as though you could pick any company that was growing and the valuation didn’t matter because the stock price just kept going up. I think 2021 has shown that once the hype subsides, the financials do actually matter!
My philosophy around investing is moving between value and growth where I see opportunity. When growth stocks are priced at ridiculous levels I try to put new investment money into more value related stocks that may not have as much long term upside potential but will continue to grow my money.
I always have a mix between the types of stock investments (Value and Growth). The reason I do this is that I can keep invested at all times and not to try to perfectly time the market, but I can rotate between the two types of investments as I see fit (better opportunity to keep growing my money).
My thought process is if I can pick up good growth companies at fair valuations that are in exciting sectors. These investments may fuel outperformance over the years as their fair value will grow at a faster pace than the general market.
If you buy a growth stock after all the hype is built in and it’s trading at 100-150% of fair value or historical multiples, you have left yourself open to losing 50% or more on the investment. Then you may have to wait years for the companies valuations and growth to meet up with the original valuation that was paid for.
Then when it comes to value plays, I am looking for stable companies that may be growing at the same pace or slightly faster than average. I am looking for these companies to be beaten up over some short term issues or to trade below fair value where I can gain alpha on a 30% return back to fair value. These are names like Target (TGT) or PepsiCo (PEP)
For me, I’m trying to constantly rotate my money to keep it growing but also trying to defend myself against investments losing 50% in a year. Of course that is just me and my investing style. Each person will have different objectives and risk tolerances.
So are growth stocks dead?
A lot of these growth names eventually get to a price where the valuation starts to make more sense. Is the price to sales multiples trading at historical levels for the company or industry? Just something to think about if you have a ton of growth names in the portfolio.
I had someone ask me how to know when to cut losses? For me personally, I look at the position I’m in and ask would I still buy the stock for the long term at this price regardless of my cost basis.
Looking at a position without the attachment of losses will make it so you are not making emotional decisions.
What is a name that looks to have pulled back to fair value?
One name I was buying into was Teladoc around the $160-$180 level.
With an expected growth rate of 37% in revenue growth over the next five years it is trading back to a historical range of price to sales that makes more sense and more in line with fair value or maybe even slightly under fair value if they can truly deliver those growth estimates. I’ll be adding to this position as nothing from my original thesis has changed and if they can keep delivering the growth on this growing macro trend the financials and valuation should follow.
So now the hype is dying across the board of growth, instead of getting discouraged this is the time to scan the great companies and find which ones still will be great long term investments!