Growth stocks, especially hyper-growth stocks with no profit hopes, have been decimated over the past year. The second half of 2022 may be no different, as investors rush to the exits ahead of what could be a slide in corporate earnings.
Undoubtedly, higher interest rates are undesirable. However, with inflation running hot, higher rates are the lesser of the two evils. As inflation looks to wind down in the second half, markets may have permission to move a little higher, as fears of much higher Bank of Canada rate hikes are taken off the table.
For now, though, the focus is on earnings season. Unlike past earnings seasons, the sentiment is very jittery, with investors throwing in the towel this week in anticipation of ugly forecasts and potential negative surprises. Not all growth companies are built the same. Some can continue delivering exceptional results. That said, the first round of earnings could add to the fears of investors, many of whom are already sitting on sizeable losses.
It’s not an easy time to be a new investor. That said, those who embrace the recent barrage of volatility could be the ones that walk away ahead in five to 10 years from now.
Earnings headwinds on the horizon
Recently, analysts over at Morgan Stanley, warned that the U.S. dollar could be a headwind that could bring forth even more pain for broader markets. While near-term currency fluctuations could weigh heavily on coming quarterly results, I’d argue that investors should not care about such near-term factors that tend to cloud the only thing that matters: the long-term fundamentals.
Currencies will fluctuate in both directions. The U.S. dollar will get strong, and it’ll surely get weak again. Instead of focusing on such, investors should focus on great growth firms that can power through a 2023 economic downturn en route to the next bull run.
While it may be too soon to reach for the growth plays that have shed over 80% of their value from peak to trough, I think profitable firms are more than worth owning here.
Alimentation Couche-Tard
Alimentation Couche-Tard (TSX:ATD) is a convenience retailer that’s essentially perfected the art of M&A. Though the pace of acquisitions has slowed over the past five years, the firm is inching ever closer to its next blockbuster deal. The balance sheet is incredibly solid, with enough dry powder to scoop up a bargain in the coming recession. Whether Couche opts to go bargain hunting in H2 2022 or H1 2023, I think management deserves a pat on the back for not wheeling and dealing in 2021, as many euphoric firms were inclined to.
It’s not just Couche’s growth-by-acquisition story that has me bullish. It’s the strong management and their ability to adapt to inflation and stagflation. Higher prices have caused many to reach for private-label goods. Though higher fuel prices may weigh on visits, I think fuel will retreat in due time. And visits could accompany a nice jolt in fuel margins.
In any case, the long-term story is still intact, and as the firm ups its earnings growth, investors would be wise to be a buyer of any dips.
