As we navigate the tricky waters of this unprecedented market environment, it helps to approach the equities sector with a contextual and nuanced perspective. Rather than a simply buy-or-sell narrative, investors should engage viable growth stocks with the understanding that they may be buys — but only when certain conditions are met.
Primarily, the biggest threat to both the market and the underlying economy may be deflation rather than inflation. Yes, I understand that the mainstream media is freaking out over rising prices in certain markets, such as gasoline and food. But you also must consider the context. Due to the novel coronavirus pandemic, we’ve suffered a tremendous disruption to our supply chains. Further, speculation toward growth stocks gives the impression of runaway inflation.
In reality, you just need to look at the facts to convince yourself that deflation is right around the corner, if not already at our doorsteps. For instance, national GDP has risen to an all-time high of $22 trillion, while the employment level is 4.5% below its pre-pandemic peak. Higher economic output across a smaller worker base is deflationary. Thus, more than likely, deflation will have a major impact on growth stocks.
If you’re still not convinced, consider wealth distribution data from the Board of Governors of the Federal Reserve System. The middle class was one of the biggest losers of the coronavirus pandemic, with the share of total net worth among the 50th to 90th wealth percentiles declining to 28.3% in the fourth quarter of 2020 from 29.6% in Q1 2020. When people lose net worth from job loss, that’s deflationary for growth stocks in the long run.
Finally, investors should look at the personal saving rate, which has never dipped into single-digit territory since the health crisis. Again, the evidence points to deflation as the threat to our economic recovery, not inflation. Because of this, it’s imperative that you have a game plan for the growth stocks to buy on a potential dip.
- Kinross Gold (NYSE:KGC)
- Callon Petroleum Company (NYSE:CPE)
- Amazon (NASDAQ:AMZN)
- Sony (NYSE:SONY)
- Match Group (NASDAQ:MTCH)
- DraftKings (NASDAQ:DKNG)
- Ford (NYSE:F)
Before we get into it, there’s one last point I’d like to address. While it’s true that the Fed can “print” their way to attempt an inflation spike, monetary policy is a team sport. If money velocity is desperately low (it is), then it doesn’t matter what the Fed does. In my view, that’s still deflationary, which is why you should wait for a dip before buying these growth stocks.
Growth Stocks: Kinross Gold (KGC)
Typically deployed as a hedge against inflation, investors turn to precious metals to protect their wealth. The thinking goes, inflation destroys net wealth as the purchasing power of each unit of currency held declines in value. But since precious metals represent rare commodities, their value will only increase. But if we incur a deflationary shock, then logically it seems the opposite would be true.
In this scenario, each unit of currency held would increase in purchasing power. That would be net negative for commodities and in turn would suggest that mining firms like Kinross Gold would be due for a correction. With so much going on in the global economy, I’m not entirely sure if buying KGC stock at these elevated levels would be the wisest move.
Nevertheless, KGC is one of the growth stocks that I personally would look into should a deflationary shock cause a dip in its price. In my thinking, the volatility would only be temporary as the precious metals would become more valuable as a fear trade and not necessarily from monetary policy developments.
Growth Stocks: Callon Petroleum Company (CPE)
An independent oil and natural gas firm, Callon Petroleum Company specializes in the “acquisition, exploration and development of high-quality assets” in the lucrative oil markets of western and southern Texas. Personally, I would take a long look at any viable growth stocks related to the fossil fuel industry. Mainly, this is because “dirty” energy is a beautiful contrarian opportunity.
Yes, I totally get that President Joe Biden and the Democrats in control of Congress want to push their clean energy agenda. In addition, I think conservatives don’t mind initiatives for developing next-generation green infrastructure. After all, that would make the U.S. less dependent on oil from the Middle East. But green policies are not economically feasible, particularly when you’re talking about electric vehicles.
Sure, many folks have been buying EVs — and I’m about to discuss an EV manufacturer later on this list of growth stocks. But the rest of the population will have trouble unless radical changes in battery technology arrive. Further, if we suffer deflation, most folks will simply go back to buying combustion-based cars as a matter of financial necessity.
I don’t think the market really realizes the harsh realities of going green. Therefore, I’d be a dip buyer of CPE stock.
Growth Stocks: Amazon (AMZN)
I hope I don’t trigger the algorithms assessing my writing the wrong way, so let me be very clear: I do not endorse the idea of buying Amazon shares at current levels. In my opinion, AMZN stock is a beneficiary of a shock inflationary pressure. The catalysts are work-from-home protocols amid the Covid-19 pandemic and stimulus checks in response, thanks to Uncle Sam.
It’s a similar dynamic with used cars. I recently sold my high-mileage beaters to my local Carmax (NYSE:KMX) store. Prior to the pandemic, I would have been lucky to get anything out of these well-used vehicles. Suddenly, the coronavirus made everyone want to buy cars. But this circumstance isn’t going to last as artificially disrupted supply chains largely caused this crisis within a crisis.
Therefore, when supply chains eventually normalize — and when the government stops sending checks and giving other pandemic-related benefits — deflation will probably hit the market. That’s when I would look to pounce on growth stocks like Amazon.
But wouldn’t deflation make the longer-term argument for AMZN problematic? Perhaps. But e-commerce has become so ingrained in our new normal that Amazon at a lower price seems a solid bet.
Growth Stocks: Sony (SONY)
When I put Sony up on a list of growth stocks to consider, you’ve got to know that I’m biased. I’m a stakeholder, but more importantly, I worked at Sony Electronics for many years. I wouldn’t say that I’m an expert on all things SONY stock since I’ve been far removed from the underlying company’s inner workings. But I know it better than most other equity units.
And one thing that is sacrosanct is that when it comes to anything related to the Japanese consumer electronics giant, Sony PlayStation is the alpha and omega. That’s really how boss the PlayStation is — it’s more alpha than Sony’s Alpha mirrorless cameras.
Truly, when SONY was the laughingstock of its core industry, PlayStation kept the lights on. It’s a good thing that management never spun off the video game division because you would have seen a mass exodus as employees would have begged the entertainment unit to make room.
Presently, the narrative for SONY is much improved from its darker days. But that also implies that a dip may be coming due to deflationary pressures. If so, I’d take the discount. The gaming industry may generate revenue of $291 billion by 2027. Since we’re talking about cheap entertainment, deflationary shocks may not have a lasting impact on this sector.
Match Group (MTCH)
One of the more speculative ideas on this list of growth stocks, Match Group nevertheless may turn out to be one of the biggest winners post-Covid over the long haul. Primarily, I say this because the coronavirus will likely change the public’s opinion about online dating for the better.
According to a report from the Pew Research Center just before the pandemic struck, opinions about online dating were surprisingly lackluster. According to the survey, “Half of Americans believe that online dating has had neither a positive nor negative effect on dating and relationships.” Post-pandemic, my belief is that this attitude will change strongly for the better.
Nowadays, it’s imperative that people build trust before they start down an intimate road. I’ve got to imagine that Covid-19 has taught us just how quickly microbiological threats can ruin us personally and collectively. With Match Group’s massive online dating footprint, this is a net positive for MTCH stock.
Nevertheless, I don’t think any sector is immune from a deflationary shock. Therefore, should MTCH fall victim to a selloff, make sure to consider adding it to your portfolio.
I’m conflicted about including DraftKings on this list of growth stocks to advantage during any dips. If we were talking about DKNG stock before the pandemic, this would have been a much easier decision. Thanks to favorable legislation, the legalization movement for sports betting achieved a massive victory. Further, many states see the revenue-generating opportunity, thereby deciding to give it the green light.
But the pandemic and its economic impact has put a dark cloud over DraftKings and the sports betting industry. Yes, I understand that retail revenge is a genuine phenomenon and that alone could provide a tailwind for DKNG. Further, speculation based on stock trading on margin data reached a fever pitch. Fundamentally, this is supportive of DKNG shares.
At the same time, a deflationary environment can knock the wind out of consumer spending. As I mentioned earlier, the elevated personal saving rate already indicates that millions of households are saving whatever money they can.
Still, it’s quite possible that the collective psyche has changed. Perhaps America has become a country of risk-tolerant speculators. If so, DKNG may be a buy should it succumb to deflationary winds.
While it’s a common mantra, there’s a mountain of evidence to suggest that electric vehicles are our future. Note that I didn’t say when that future is. As investors, we should be prepared for multiple scenarios, including that the future may arrive after we’ve long expired.
But whatever the case may be, Ford makes a compelling argument if you believe in the mainstreaming of green transportation. On a year-to-date basis, F stock is up over 87%, which is far higher than many of the EV growth stocks that were heralded in 2020.
But why is Ford succeeding now while others are fumbling? Much of it has to do with credibility. As a recognized and arguably trusted brand, Ford has the scope and scale to make EVs work. Further, because EVs represent a still new technology, consumers find this footprint comforting.
Additionally, Ford makes excellent combustion vehicles. While everyone loves the idea of EVs, the industry still has many challenges, infrastructure being a big one. Thus, if there are hiccups with the EV rollout, Ford has an excellent backup plan.
Of course, deflationary shocks will be a problem for any equity unit, F being no exception. But once the pain subsides, the market will realize that people still need automotive transportation, whether powered by electricity or combustion. Therefore, I’d take a long look at any dip-buying opportunities.
On the date of publication, Josh Enomoto held a LONG position in SONY and F. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.