The year 2021 was a wild one with fears over surging inflation and concerns about the COVID-19 pandemic hindering an economic recovery. However, the stock market has had a solid performance yet again, so much so that the S&P 500 gained approximately 26% for the year and continues to hit record highs.
As we’ve rung in 2022, globally, supply chain bottlenecks and an ongoing effort to battle COVID-19 continues to loom, yet economists appear to be bullish on the new year. In a stock picker’s market, investing in a combination of growth and value stocks could be a defining factor in shaping a financially sound portfolio for 2022.
Here we delve deeper into growth and value stocks and highlight those that could well zoom in the new year given their strong underlying growth impetus.
What are growth stocks?
Growth stocks are companies that are expected to grow at a rate that is significantly above the average business in their industry or the market as a whole. Typically, these are set apart from their counterparts for developing innovative products or services that are either gaining a substantial share in existing markets or are entering new markets. At times, these firms may even create entirely new industries. Businesses that can grow faster than the average for long periods of time tend to be rewarded by the market, which in turn helps them deliver handsome returns to shareholders.
Here are some of growth companies’ main characteristics:
- High revenue and earnings growth rate: as mentioned above, these stocks grow at a faster pace than the average stock in the market.
- Competitive advantage: this significant growth is often due to the fact that they possess some kind of competitive advantage over their competitors, which fuels its USP (unique selling proposition).
- Long-term dominance: these stocks’ competitive advantage means that they enjoy a loyal and growing consumer base, which may provide the potential for long-term market dominance. For instance, blue-chip companies with a legacy spanning several years like Microsoft (MSFT) or Walmart (WMT) were once up-and-comers with growth stock aspiration.
- Low or no dividends: bearing in mind that these firms are on a growth trajectory, they often need to reinvest their earnings in order to accelerate their growth in the short-term. As a result, they often don’t pay dividends.
In addition, growth stocks often tend to be expensive than the average stock, trading at a high P/E (price-to-earnings) ratio, price-to-sales ratio and price-to-free-cash-flow ratio. Investors believe that they will earn money through capital gains when they eventually decide to sell their shares. What’s more, growth stocks come in all shapes and sizes – from major industry giants like Amazon (AMZN) and Google (GOOG / GOOGL) to smaller heavyweights like Shopify (SHOP) and Salesforce (CRM).
Why invest in growth stocks?
While growth stocks may not pay out dividends, the cash-out value of stocks that grow quickly and well has the potential to be far superior. Two more major advantages of investing in these stocks include:
Stock price appreciation
From 2020 to 2021, Amazon’s stock price increased almost 65%, growing from $1,874.97 on January 3, 2020 to $3,182.70 by January 8, 2021, marking an impressive year-over-year growth. Having said that, the reverse may also be true. In Amazon’s case, the stock lost over 90% of its value two decades ago during the dotcom bubble burst. Still, thanks to its high growth rate, the company grew a mind boggling 1,500% in the previous decade.
By capitalising on a company’s growth momentum which results in rapid and sustained increases in the stock’s price can lead to wealth accumulation in no time. And when a company is expected to grow, investors remain willing to invest despite things like high P/E ratios, mainly due to the fact that several years down the road the current stock price may look cheap in hindsight. How can you tell whether a company has a growth stock? If it exhibits 10% to 12% growth over a period of approximately 10 years, then it reflects sustained growth.
Just like with all investing, there is a fundamental trade-off between risk and return when it comes to growth stock investing. Their ability to offer greater potential for future return means that they are equally matched by greater risk and one of the primary risks of these stocks is that the expected or realised growth may not continue into the future. As a result, growth stocks may be best suited for investors with a long-term horizon and those with a higher tolerance to risk.
What are value stocks?
Value stocks are those that trade below their intrinsic value and fundamentals, such as dividends, earnings or sales, which makes them particularly appealing to value investors. Although often underrated or ignored by the market, value stocks have the potential to eventually gain in value, while investors purchase these in the hope that other market participants will realise that these stocks are undervalued and will buy the shares, driving prices higher. On the other hand, some common characteristics of value stocks include a high dividend yield, a low P/B (price-to-book) ratio and a low P/E ratio, while they are typically mature businesses, with steady growth rates and relatively stable revenues and earnings.
In contrast to growth stocks which can be adversely impacted when the economy begins to decline and the funds that were once available to fuel fast growth become difficult to find, value stocks do well during the early stages of an economic recovery mainly due to their healthy fundamentals. Having said that, when a bull market drags on, value stocks may begin to lag growth stocks.
Common metrics used to determine a stock’s intrinsic value include the P/E ratio, which establishes a relationship between a stock’s market capitalisation and a company’s total earnings, the P/B ratio, which is determined by subtracting a firm’s total liabilities from its total assets and its EPS (earnings per share). This last metric is calculated by taking a company’s quarterly or annual net income and dividing it by the number of shares of stock outstanding.
What's more, value investing tends to be a long-term and conservative approach to investing, with investors typically looking to buy and hold companies for a period of time.
Below are some reasons as to why a stock may be undervalued:
- Cyclical businesses: their performance fluctuates with the business cycle. As they experience slower demand, their stock price may also lower. For example, the airline industry was particularly affected by the pandemic. Once the economy slowed down and consumers had less disposable income, people travelled less.
- Seasonal businesses: while cyclical businesses are sensitive to the business cycle, with higher revenues during periods of economic prosperity and lower in periods of economic downturn, seasonal businesses’ performance depends on seasonality. A stock that represents a seasonal industry might boom during particular periods within the year, but could be relatively inactive during the off season and that’s when its stock price may lower.
- Negative news: at times companies can fall victim to bad news, which in turn can negatively affect their stock price. For instance, when in 2019 a Boeing 737 Max plane crashed, the company’s stock plunged the following day.
- Market recessions: typically, during market crashes investors tend to sell certain stocks in their portfolio out of fear of further losses. This so-called sell-off tends to lower stock prices. This was particularly evident during the 2008 global financial crisis.
Why invest in value stocks?
A highly sought-after investing strategy, value investing aims to benefit from value stocks in the long-term. But it involves more than just simply buying cheap stocks. The strategy is based on the idea of buying low and selling high. Here are some other important benefits of investing in value stocks:
Perhaps one of the biggest advantages of investing in value stocks is the fact that many boast strong dividend-payouts that span several decades. Value stocks with a strong dividend track record can serve as a reliable source of income. At the same time, a number of these firms have been operating for several decades and are expected to stay in business despite perhaps not being as innovative as they once were.
Top growth stocks for 2022
The year 2021 proved to be big for certain industries, with some clear-cut winners, which are expected to maintain their top position well into 2022. Bearing in mind that growth is a defining factor for these types of stocks, below are some top growth stock picks based on their CAGR (compound annual growth rate).
Shopify Inc (SHOP)
3-year sales growth CAGR: 183%
The once snowboard shop that has transformed into one of the world’s largest eCommerce platforms, Shopify continues to set eCommerce shopping on fire. For its third quarter 2021, total revenue topped $1,123.7 million, up 46% year-over-year, whereas subscription solutions revenue came in at $787.5 million, up 51% year-over-year, primarily driven by growth of Gross Merchandise Volume (GMV). In fact, cumulative GMV reached $400 billion as Shopify continues to simplify commerce for entrepreneurs.
Meanwhile, the company is harnessing new opportunities that will ensure future profitable growth through its Shopify Markets, a product that makes cross-border commerce easier for entrepreneurs, as well as Shopify Balance, a no-fee money management product offered to merchants in the U.S. The company also introduced TikTok Shopping to merchants, enabling those with a TikTok for Business account to add products that link directly to their online store checkout. And as eCommerce continues to take more and more of the retail landscape, Shopify has further room to grow.
Click here to add SHOP to your portfolio.
Square Inc (SQ)
3-year sales growth CAGR: 63%
Industry: Digital payments
A trailblazer in accelerating the global shift from cash to digital forms of payment and empowering businesses of all sizes to accept debit and credit card transactions, Square’s stock has consistently outperformed the broader market in the past year, providing a one-year trailing total return of 44.5% compared with the S&P 500’s 35.9%.
In the 11 quarters leading up to the pandemic, Square has posted dramatic adjusted EPS gains, staging a sharp rebound in the four quarters through Q2 of financial year 2021. For its third quarter 2021, the company reported an adjusted EPS of $0.37, which matched analysts’ predictions. Revenue came in at $3.8 billion, while the company highlighted a 43% year-over-year improvement in its gross profit, which was driven by a 48% year-over-year improvement in gross profit for its Seller ecosystem.
Its gross payment volume (GPV), an important metric that provides an overall picture of transaction volumes of all card payments processed by sellers using Square’s payments ecosystem, also improved. The company’s GPV has accelerated dramatically in both the first and second quarter of 2021, surging 87.8% in Q2 alone. In the meantime, its step to expand in the booming instalment loan market by purchasing Australian fintech company Afterpay is set to create a payments giant like no other.
Head over to Moneybase Invest to add SQ to your portfolio.
Netflix Inc (NFLX)
3-year sales growth CAGR: 29%
Industry: Streaming entertainment
It has been lauded for beating profit and revenue margins and for amassing a strong following of subscribers on several occasions. But what sets Netflix apart from the competition is that it continues to dominate the streaming entertainment sector, year in, year out. Indeed, the company beat analysts’ estimates in its latest results, without even having to factor in the smashing success of South Korean sleeper hit Squid Game, which has become a global sensation, making it the streaming giant’s most-watched series to date. In its third quarter, which ran through September 30, the firm reported a subscriber growth of 4.4 million, marking a solid beat over the expected 3.84 million, while it is expected to have added approximately 8.5 million subscribers in the fourth quarter.
As millions across the globe are cancelling their cable subscriptions and replacing them with less expensive means of entertainment and more convenient streaming options, Netflix offers a great way to profit from this trend. At the same time, it is aiming to grab more and more of users’ attention and veer them away from competitors in other sectors like video game companies such as Fortnite and video-focused social networks like TikTok by pushing into gaming and doing so could serve as its secret sauce for continued domination.
Interested to invest in NFLX?
Top value stocks for 2022
In a stock market that is trading near record highs, some investors may not be able to pay up for high-flying growth stocks. For those looking for more defensive value companies to add to their portfolio in 2022, here are some value stocks you may want to consider.
FedEx Corp (FDX)
Market cap: $68.51 billion (as of January 4, 2022)
Forward P/E ratio: 12.22 (as of January 4, 2022)
FedEx shares had surged for most of 2020 as soaring eCommerce demand led to an unprecedented need for delivery and logistics services just like FedEx’s. And while competition was tough and investors worried that Amazon would steal much of the market share, quarantine shopping became so prevalent that there were more than enough packages to keep FedEx busy. In contrast, 2021 has been a different story as the company fell victim to a post-pandemic slump, with its stock falling more than 5% caused by soaring fuel prices, port closures and other factors that made its business a complex operation. Despite these headwinds, the company’s earnings more than offset them as the firm reported operating income of $1.6 billion, up 9% year-over-year and up 11% on an adjusted basis.
And while shopping and sales may fluctuate depending on consumers’ taste, the need for the transportation of goods will never go away. Perhaps this is why JP Morgan Chase (JPM) recently stated that FedEx’s stock is one of their top transportation picks for 2022. With its strong financials, relatively cheap stock and its $5 billion share repurchase programme, which includes a $1.5 billion accelerated share repurchase programme, there is certainly a lot to like about this dominant delivery company.
To add FDX to your portfolio, simply here.
General Motors Company (GM)
Market cap: $88.81 billion (as of January 4, 2022)
Forward P/E ratio: 8.90 (as of January 4, 2022)
In 2020, General Motors experienced somewhat of a lull in car sales, selling about 6.8 million vehicles, when compared to around 7.72 million units in 2019 as people around the world were cooped inside with nowhere to go and with no need for new cars. At the same time, its stock bottomed out at around $20 per share during the pandemic lows in early 2020. However, since then, it has made a comeback, currently trading at $65.74 as of January 5, 2022. Some may argue that the good days of General Motors are gone, but the company has made about $145 billion in total revenue each year during the period between 2017 and 2019, while its profitability has also rebounded, with fiscal 2021 earnings predicted to hit $6.75 a share, up 38% and despite revenue pressures.
There certainly is a bit of apprehension as to what’s in store for the automotive industry what with supply chain woes and the semiconductor shortage saga persisting. Yet, General Motors is taking the EV market by storm as it is set to deliver both its Hummer EV and BrightDrop EV600 delivery van, the first two vehicles to use its next-generation Ultium battery platform. Its battery platform, which can accommodate its entire portfolio, is expected to be big and will help the company leverage massive scale and capital efficiency which in turn will give it a competitive advantage. One more catalyst for the company is General Motor Cruise’s commercial robotaxi service which will commence in San Francisco. Together, these are set to help the company stay competitive in the long run.
Goldman Sachs Group (GS)
Market cap: $132.35 billion (as of January 4, 2022)
Forward P/E ratio: 9.81 (as of January 4, 2022)
During 2020, Goldman Sachs navigated an uncertain macroeconomic environment due to the impact of the COVID-19 pandemic, but remained focused on serving clients and executing on its strategic priorities, which contributed to net revenues of $44.56 billion, 22% higher than 2019 and the highest annual net revenues in 11 years. In addition, diluted EPS was $24.74, the second highest annual EPS reported by the firm and net earnings amounted to approximately $9.5 billion in 2020. The multinational investment bank and financial services company has had an even more phenomenal 2021, mainly thanks to improving loan market conditions, a boom in investment banking fees and improving results from its wealth management services division.
In the first nine months of 2021, the company achieved an annualised RoE (return on equity) of 25.7% and an annualised RoTE (return on tangible equity) of 27.2%, both of which are key metrics used to assess a bank’s profitability. Building on this momentum, last month the company announced that it is planning to issue new profitability targets from the next three years, thanks to the investment banking and trading boom that it has experienced during the pandemic. Although the company has acknowledged that current rates of return are probably unsustainable in the long-term, it is confident that it will continue to outperform the existing mid-term target even once conditions normalise, while it will continue to benefit from cost savings and market share gain.
Head over to Moneybase Invest to add GS stock to your portfolio.
How to invest in these top performing stocks with Moneybase Invest
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To do so:
- Download the app from either Google Play or the Apple App Store. Alternatively, you may access Moneybase Invest on your desktop by visiting https://live.cctrader.com/
- Once you’ve onboarded successfully and have funded your account, head over to the search bar at the top of your screen and input either the company name or ticker symbol.
- Select the instrument of your choice from the list and then click on the Buy button on the window located at the bottom of your screen.
- On the New Order page, input the number of shares you would like to purchase and hit the Place Buy Order. The stock has been added to your portfolio.
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