Despite the well-documented struggles of growth stocks to start 2022, advisors know that clients remain fond of growth fare.
After a decade-plus of outperformance by growth stocks, clients’ affinity is easy to understand. Still, many clients aren’t aware of the differences between various growth stocks. There are those in the aggressive or disruptive camp. Many of these companies are smaller, enticing investors with exponential growth rates while concerning market participants about high cash burn rates and often long roads to profitability.
Then there are high growth names. These companies are rapidly growing and likely losing money, but they’re far closer to profitability than their aggressive growth counterparts.
Finally, there are profitable growth companies. These names blur the line between core and growth. Think Apple (NASDAQ:AAPL), Alphabet (NASDAQ:GOOG) and Microsoft (NASDAQ:MSFT), among others. With proper though not time-consuming analyst, advisors can efficiently identify an array of profitable growth opportunities.
Profitable Growth: Not Hard to Find
While there are no shortage of disruptive and high growth stocks on the market today, the good news for clients is that the bulk of growth stocks in the widely followed Russell 1000 Index are tied to profitable companies.
“By market cap, the majority of growth focused constituents are profitable. Out of 318 growth focused companies, 208 companies, representing 88% of the weight of growth focused companies, were both profitable and improving, while a further 8% were profitable and deteriorating,” according to Global X research.
As for sectors that are home to the largest concentrations of profitable growth companies, those groups are, in order, technology, consumer discretionary, communication services and healthcare. Taking things a step further and looking at margins, improving and declining, turns up similar sector-level results.
“This created an additional four camps, negative margins and deteriorating, negative margins and improving, positive margins and deteriorating and positive margins and improving. The same sectors, ranked in the same order, had the greatest weights of companies that have both positive and improving margins. From an industry standpoint, Software, Technology Hardware, and Interactive Media all remained on top with the inclusion of Semiconductors & Semi Equipment,” adds Global X.
There’s more good news for growth-hungry clients. As Global X points out, if markets are pricing in future earnings today – what efficient markets are supposed to do – current multiples and further out expectations are clearly disconnected. That could create attractive opportunities among profitable growth companies.
Bottom line: There are some strong opportunities in the growth space today.
“In conclusion, even though the current market environment seems to favor more value focused, dividend paying companies, there are still opportunities available for investors to identify profitable growth companies. Selectivity is key, because while certain sectors may show profitability, if one takes a deeper dive on an industry level, certain industries in that sector are likely driving profitability while others are detracting from it,” concludes Global X.
Of interest to advisors, healthcare, which is historically inexpensive and chock full of quality traits, is among the more attractive considerations in the growth space today.
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