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Is This the Right Time to Jump into Growth Stocks?
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Growth is the strategy that has you buy investments today because of their future potential. It involves studying a company’s prospects from the data that you have today, which could be anything from product roadmap, to production and sales strategies, to the level of skill in the workforce, to management track record to competitive moat.
There could be so many reasons why a company is likely to do well. For investors buying a stock before it is well known or before it has proved its model, there could be big returns as the company comes of age. This is essentially referred to as the growth strategy.
However, as we all know, the markets are uncertain in the best of times. Therefore, when you are investing in future potential, there is necessarily some risk involved. When all is going well, the economy is in expansion mode, when investors are pumping more into the markets, there are more funds available for deployment in risky assets (including in growth stocks given the risk involved in betting on the future). Therefore, investors generally go for growth stocks when they expect a market recovery.
This year has started off well for growth names because the market expected the Fed to stop hiking rates, which would lead to stabilization. Although most of the money flowed into the largest tech stocks where growth is less risky, investors have been opening up to the idea of getting back into growth.
One big factor that helped investor sentiments is the persistent decline in inflation rates. Although still below the Fed’s target (especially on the core basket), the downward trajectory is apparent. Earlier we heard that the pause in rate hikes could very well be a trend. And now, the feeling on the street is that we are headed toward the soft landing after all and the Fed could overdo things with another rate hike.
Therefore the question is, given these circumstances, should you be thinking of growth stocks? Or is it a better idea to continue playing safe (not easy to do if you see just how far big tech has gone this year to date). This obviously depends on your personal investment goals. If you don’t have that many years left in the market, you may want to tread more cautiously. If you do, and you also have some cash sitting in your bank account from which you’d like to see some capital appreciation, growth is definitely for you. Just don’t be hasty, do your homework and adopt tried and tested strategies.
At Zacks, we also have a Growth Style Score, which gives you an indication of a stock’s growth potential. Paired with a #1 (Strong Buy) or #2 (Buy) Rank, you greatly increase your chances of success. Add to these an attractive Zacks Industry Rank, high growth rate for this year, a reasonable growth rate for the long term and a quick ratio of more than 2 (an indication of good liquidity, which is essential for growth stocks to be able to continue delivering on their goals).
The Zacks Rank #2 stock has a Growth Score of A. The Cosmetics industry to which it belongs is in the top 29% of Zacks-classified industries, which further increases its chances of upside.
The company’s growth profile is seen from the following estimates: The 2023 estimate has increased 12.3% in the last 60 days and currently represents 9.6% growth. The 2024 estimate has increased 9.6%, representing 19.4% growth. The long-term estimate is 20.0%.
The quick ratio is 2.06, meaning that it has highly liquid assets that can cover more than twice its current liabilities/obligations.
This Zacks Rank #2 stock with Growth Score A belongs to the Automotive - Original Equipment industry (top 35%).
Both its 2023 and 2024 estimates are up a penny in the last 60 days and represent 22.8% growth for 2023 and 24.8% growth for 2024. In the long term, it is expected to grow 20.8%.
Its quick ratio of 2.17 indicates sufficient liquidity.
Therefore, GNTX is another solid pick for growth-oriented investors.
Zacks #1 ranked Wingstop with a Growth Score A belongs to the Retail - Restaurants industry (top 10%).
Analysts are highly optimistic about the company’s growth prospects. In the last 60 days, the 2023 estimate has increased 7 cents, representing 15.7% growth for the year. The 2024 estimate increased 6 cents, which is 15.8% growth from 2023. The long-term growth estimate of 20.0% is even stronger at 20.0%.
Additionally, WING’s quick ratio of 3.63 indicates solid liquidity that can continue to drive its business.
Zacks #2 ranked Planet Fitness belongs to the Leisure and Recreation Services industry (top 31%). It has a Growth Score of A.
The company’s estimates have not changed in the last 60 days, but current growth rates of 31.7% for 2023 and 22.4% for 2024 are rather attractive, as is the long-term growth rate of 25.4%.
Zacks #2 ranked Okta, which also carries a Growth Score of A belongs to the Internet - Software and Services industry (top 14%).
The company’s 2023 estimate has increased 19.7% and the 2024 estimate has increased 11.2% in the last 60 days. Because of the loss in 2022, the current year’s growth is 2375.0%. The increase in 20224 is 42.3%. In the long term, analysts expect the company to grow 41.6%.
With a quick ratio of 2.20, Okta makes a great pick.
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Is This the Right Time to Jump into Growth Stocks?
Growth is the strategy that has you buy investments today because of their future potential. It involves studying a company’s prospects from the data that you have today, which could be anything from product roadmap, to production and sales strategies, to the level of skill in the workforce, to management track record to competitive moat.
There could be so many reasons why a company is likely to do well. For investors buying a stock before it is well known or before it has proved its model, there could be big returns as the company comes of age. This is essentially referred to as the growth strategy.
However, as we all know, the markets are uncertain in the best of times. Therefore, when you are investing in future potential, there is necessarily some risk involved. When all is going well, the economy is in expansion mode, when investors are pumping more into the markets, there are more funds available for deployment in risky assets (including in growth stocks given the risk involved in betting on the future). Therefore, investors generally go for growth stocks when they expect a market recovery.
This year has started off well for growth names because the market expected the Fed to stop hiking rates, which would lead to stabilization. Although most of the money flowed into the largest tech stocks where growth is less risky, investors have been opening up to the idea of getting back into growth.
One big factor that helped investor sentiments is the persistent decline in inflation rates. Although still below the Fed’s target (especially on the core basket), the downward trajectory is apparent. Earlier we heard that the pause in rate hikes could very well be a trend. And now, the feeling on the street is that we are headed toward the soft landing after all and the Fed could overdo things with another rate hike.
Therefore the question is, given these circumstances, should you be thinking of growth stocks? Or is it a better idea to continue playing safe (not easy to do if you see just how far big tech has gone this year to date). This obviously depends on your personal investment goals. If you don’t have that many years left in the market, you may want to tread more cautiously. If you do, and you also have some cash sitting in your bank account from which you’d like to see some capital appreciation, growth is definitely for you. Just don’t be hasty, do your homework and adopt tried and tested strategies.
At Zacks, we also have a Growth Style Score, which gives you an indication of a stock’s growth potential. Paired with a #1 (Strong Buy) or #2 (Buy) Rank, you greatly increase your chances of success. Add to these an attractive Zacks Industry Rank, high growth rate for this year, a reasonable growth rate for the long term and a quick ratio of more than 2 (an indication of good liquidity, which is essential for growth stocks to be able to continue delivering on their goals).
Here are a few examples:
e.l.f. Beauty, Inc. (ELF - Free Report)
The Zacks Rank #2 stock has a Growth Score of A. The Cosmetics industry to which it belongs is in the top 29% of Zacks-classified industries, which further increases its chances of upside.
The company’s growth profile is seen from the following estimates: The 2023 estimate has increased 12.3% in the last 60 days and currently represents 9.6% growth. The 2024 estimate has increased 9.6%, representing 19.4% growth. The long-term estimate is 20.0%.
The quick ratio is 2.06, meaning that it has highly liquid assets that can cover more than twice its current liabilities/obligations.
Therefore, ELF makes a solid pick.
Gentex Corp. (GNTX - Free Report)
This Zacks Rank #2 stock with Growth Score A belongs to the Automotive - Original Equipment industry (top 35%).
Both its 2023 and 2024 estimates are up a penny in the last 60 days and represent 22.8% growth for 2023 and 24.8% growth for 2024. In the long term, it is expected to grow 20.8%.
Its quick ratio of 2.17 indicates sufficient liquidity.
Therefore, GNTX is another solid pick for growth-oriented investors.
Wingstop Inc. (WING - Free Report)
Zacks #1 ranked Wingstop with a Growth Score A belongs to the Retail - Restaurants industry (top 10%).
Analysts are highly optimistic about the company’s growth prospects. In the last 60 days, the 2023 estimate has increased 7 cents, representing 15.7% growth for the year. The 2024 estimate increased 6 cents, which is 15.8% growth from 2023. The long-term growth estimate of 20.0% is even stronger at 20.0%.
Additionally, WING’s quick ratio of 3.63 indicates solid liquidity that can continue to drive its business.
Planet Fitness, Inc. (PLNT - Free Report)
Zacks #2 ranked Planet Fitness belongs to the Leisure and Recreation Services industry (top 31%). It has a Growth Score of A.
The company’s estimates have not changed in the last 60 days, but current growth rates of 31.7% for 2023 and 22.4% for 2024 are rather attractive, as is the long-term growth rate of 25.4%.
Its quick ratio is 2.25.
Okta, Inc. (OKTA - Free Report)
Zacks #2 ranked Okta, which also carries a Growth Score of A belongs to the Internet - Software and Services industry (top 14%).
The company’s 2023 estimate has increased 19.7% and the 2024 estimate has increased 11.2% in the last 60 days. Because of the loss in 2022, the current year’s growth is 2375.0%. The increase in 20224 is 42.3%. In the long term, analysts expect the company to grow 41.6%.
With a quick ratio of 2.20, Okta makes a great pick.
One-Month Price Performance
Image Source: Zacks Investment Research