Recently, the market has experienced increased volatility, with a major factor being the Federal Reserve’s hawkish pivot. The Fed seems to be more focused on combating inflation, and the market is now expecting at least two rate hikes next year. As a result, the yield on the two-year Treasury Note has moved up from 0.15% in June to 0.65%. Rising short-term rates are a headwind for growth stocks, which perform their best in environments where rates are declining.
So, it’s not surprising that growth stocks led the market to the downside last week. A good example is the ARK Innovation ETF (NYSEARCA:ARKK) which is down more than 19% in just the past month. In contrast, the S&P 500 and Nasdaq are down 0.64% and 2.25%, respectively.
However, I believe this pullback in growth stocks offers investors an opportunity. The rise in short-term rates may soon be over, as forward-looking inflation measures are moderating at a rapid pace. Further, after the recent steep pullback, many growth stocks have reached more attractive valuation levels. Therefore, investors should consider buying the dip in these three top growth stocks:
Growth Stocks to Buy: Alphabet (GOOGL)
Alphabet recently became the third-most-valuable company in the world with a market capitalization of over $1.9 trillion. The company’s primary source of revenue and income remains Search which is very profitable and maintains a dominant market share. Over the years, GOOGL has expanded into other areas like Google Cloud, Android, Chrome, Google Docs, YouTube, and its venture bets like autonomous driving venture Waymo.
GOOGL stock was initially an underperformer during the pandemic as ad spending decreased. Further, ads from travel companies were put on hold, and those comprise a meaningful chunk of revenue. However, ad rates and ad spending are now well above pre-pandemic levels as the economy reopens and gradually normalizes.
The company’s momentum is evident in its results for Q3. Revenue increased by 41% to $65.1 billion, while operating income increased by 32% to $21 billion. For the full year, analysts project EPS growth of 85% and 39% revenue growth. Not surprisingly, GOOGL’s stock is up more than 60% year to date and the company has shown impressive relative strength during this period of market stress.
GOOGL’s POWR Ratings reflect this promising outlook. The stock has an overall B rating, which equates to a “Buy” in our proprietary rating system. B-rated stocks have posted an average annual performance of 19.7% which compares favorably to the S&P 500’s annual return of 7.1%. To see more information about GOOGL’s POWR Ratings, click here.
Workday provides enterprise cloud applications with offerings that include financial management applications, cloud spending management solutions, and Workday applications for planning. YTD, WDAY’s stock is up 17%, and that number surges to almost 500% since its IPO in 2013.
Cloud and enterprise software stocks have been among the best performers of the last decade. It’s not surprising when considering that companies are increasing spending on their IT systems, software and cloud systems at a strong rate which is expected to continue over the next decade.
For investors, these companies are fantastic, because they tend to have high margins and recurring revenue. Once companies choose a software or cloud provider, they are unlikely to change often given the cost and complexity of changing systems. Further, once companies have people on their platforms, they are able to unlock more opportunities for monetization.
Despite the stock’s recent underperformance, the business continues to gain momentum. Its last earnings report showed a 20% increase in revenue to $1.3 billion with over 90% of revenue coming from recurring subscriptions. It also made a new milestone in terms of EPS going from a loss of 10 cents per share last year to a profit of 17 cents per share this year’s Q3.
WDAY has an overall B rating, which equates to a “Buy” in our POWR Rating system. The POWR Ratings also evaluate stocks by various components to give more insight. In terms of its component grades, the stock has an A grade for Growth and a B grade for Sentiment and Quality. Click here to see the complete POWR Ratings for WDAY.
Growth Stocks to Buy: Expedia (EXPE)
Expedia is an online travel company that operates through multiple segments. Some of its most well-known brands include Expedia, Vrbo, Hotels.com, Orbitz, Travelocity and Wotif. In addition, it offers a range of travel and non-travel verticals, including corporate travel management, airlines, travel agents, online retailers, and financial institutions.
EXPE’s business took a big hit during the pandemic for obvious reasons. However, travel volumes are increasing and during the Thanksgiving holiday were at 90% of 2019 levels. It’s very possible that the recent rise in coronavirus cases and the emergence of the omicron strain could have a short-term impact. However, in the longer-term, vaccination rates and effective therapeutics are signs that the pandemic is close to an end.
The company’s recent earnings report also confirms the recovery in travel. The company topped expectations with revenue increasing by 97% to $3 billion. In total, it had $553 million in net income, a big turnaround from last year’s $31 million loss. For Q4, analysts are projecting $2.3 billion, a 148%increase and a big jump in EPS to $6.89 per share.
EXPE’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall C rating, which equates to a “Neutral” rating in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
EXPE has a B grade for Growth and Quality which isn’t surprising considering its Q3 results and status as one of the top online travel companies. To see EXPE’s complete POWR Ratings, click here.
On the date of publication, Jaimini Desai did not have (either directly or indirectly) positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Jaimini Desai has been a financial writer and reporter for nearly a decade. He has helped countless investors take profitable rides on some of the hottest growth trends. His previous experience includes writing for Investopedia, Seeking Alpha, and MT Newswires. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters.