Overvalued tech stocks are undergoing a major correction after inflating on the back of high liquidity from fiscal stimulus packages. In every pandemic wave, tech stocks surged. Interest rates were at record lows, which made funding easily available and the bond market unattractive to investors. But the 2022 pandemic wave is different as the Bank of Canada and the US Federal Reserve plan to increase interest rates this year to control inflation. Interest rates and the stock market have an inverse relationship.
Tech stock sell-off
So does this mean the tech bubble, which many value investors like George Soros have been warning about, is finally here? It looks so. But the good thing about bubbles is they make some good growth stocks insanely cheap. Remember the March 2020 dip. At that time, the entire market crashed, including tech stocks, as there was no record-low interest rate, and there was uncertainty around the future and governments’ initiatives. But then tech stocks surged as the pandemic turned out to be a catalyst for many cloud-based services.
The 2022 tech sell-off has nullified all the growth from the pandemic and bought many stocks back to July 2020 levels. I expect more sell-off before the panic selling eases. This sell-off has created an opportunity to buy two strong growth stocks at a cheap value:
- Descartes Systems (TSX: DSG)(NASDAQ: DSGX)
- Dye & Durham (TSX: DND)
Descartes Systems
The tech sell-off began at the end of December 2021 and pulled Descartes Systems stock down 20% to June 2021 levels. This dip has nothing to do with Descartes’s fundamentals. The company provides supply chain management solutions to several verticals ranging from e-commerce to airlines to industrial. In 2020, e-commerce fueled Descartes’s growth, and airlines joined in 2021. In 2022, industrial could gather momentum as auto companies overcome supply bottlenecks.
Descartes’s stock has been on a growth spree for over six years, growing at a compounded annual growth rate of 20%. In these six years, it saw the oil crisis, trade war, and the pandemic. The stock has proven its resilience in the worst of crises. This could be a good stock to buy the dip as it could accelerate your growth in a bullish market. But do not forget to book some profit (maybe 20%-25% of your holdings) in good times, so it hurts less when the stock dips. Timely profit booking keeps you motivated to stay invested in a good stock and even buy more in a dip.
Dye & Durham stock
Dye & Durham stock slipped 23% in the tech sell-off and is now trading at December 2020 levels. Once again, there are no changes in its fundamentals. The company has long-term service contracts with customers that give it predictable cash flows. Dye & Durham serves a niche market of legal professionals, governments, and businesses. Its strategy is to grow through acquisitions, and it even turned down a management buyout offer as it saw more returns from its current strategy.
Dye & Durham last reported a 55% adjusted EBITDA margin on revenues of $112.6 million in the quarter ended September 2021. The current dip has created an opportunity to buy a growth stock with strong fundamentals at an attractive valuation. The company also pays dividends, but that is not a motivating factor as the yield is only 0.21%. Even if the stock returns to its 200-day moving average of $43.5, it represents a 24% upside from the current trading price.
