Growth stocks are taking endless shots these days, with the Nasdaq 100 taking another spill in Thursday’s brutal session of trade. Undoubtedly, tech took a brunt of the damage, but the broader S&P 500 and TSX Index were also dragged lower, as white-hot inflation numbers (CPI at 7%) in the U.S. came in while jitters over quicker rate hikes took hold.
While three or four rate hikes may be baked in (I think it’s closer to three) at this juncture, growth-focused investors do not want to be caught offside should the U.S. Federal Reserve (and Bank of Canada) start hinting at five or even more rate hikes for 2022. Indeed, five rate hikes seems a tad too much, but it may be required to get inflation back below these painful highs. COVID and supply chains issues continue to plague the broader markets, and inflation may persist so as long as rates aren’t cranked up, perhaps by over a full percentage point this year!
Rate hikes could punish growth, but not all growth stocks are built the same
In any case, investors should consider the full range of possibilities with rate hikes and the implications on growth stocks. Nobody knows if the Fed will hike rates four or five times, or even just once this year. Indeed, the degree of uncertainty seems high, and that’s paved the way for tremendous volatility. Although the S&P 500 has fallen by around 3%, the index doesn’t tell the full story, given high-multiple tech has been imploding, while some of the boring, unloved sectors of this market have shined oh, so brightly. Think the financials, energy, and consumer staple names that were scoffed at by growth-focused investors back in late 2020.
Now, nobody knows when the tech spill will end. It may have bottomed on Thursday. We really won’t know until well after the fact! That’s why it’s wise to at least begin doing some buying of the growth names. You don’t need to jump into the deep end with Shopify stock, a name that could fall another 35% in a worst-case scenario with rates.
Instead, you can stick with profitable growth. Companies growing actual earnings will remain resilient, even as rates rise, bringing down their overly expensive counterparts. While Shopify does have a plan to rake in greater profits, the stock remains unbelievably expensive at over 30 times sales. Very expensive stocks and unprofitable stocks could blow up in investors’ faces if they’re not careful.
Restaurant Brands: Compelling growth for cheap
In this piece, consider profitable and cheap growth stocks like Restaurant Brands International (TSX:QSR)(NYSE:QSR). Now, Restaurant Brands isn’t a sexy play that will deliver life-changing returns over a short-term period. It is a company that I believe is trading at a nice discount to intrinsic value, with solid growth prospects for 2022 and beyond. While the company has sagged lower on questionable performance amid COVID, I think that the name also has the most room to run versus most of its fast-food peers once the Omicron wave is over and the pandemic has a chance to go endemic.
Nobody knows when that will happen, but when it does, QSR stock could have room to the upside, as sales-eroding effects diminish. Further, Restaurant Brands will benefit from the many restaurants that were forced to close up shop during these challenging times. A less-crowded landscape and modernization investments make QSR stock an intriguing contrarian play.
Add the international store expansion potential into the equation, and you’ve got the formula for a stealthy growth stock disguised as an unloved value play. And for the income savvy, there’s a 3.8% dividend yield to collect while you wait for the macro environment to improve.
