Green shoots on the horizon
5 reasons growth investors can take heart in 2022.
When it comes to geopolitical, economic and market challenges, 2022 is offering up an abundant supply. But macroeconomic conditions are always in flux, and active growth investors know that even the most difficult conditions can be precursors to opportunity. Here’s our take.
- Opportunities in the market are narrowing Amid rising inflation and interest rates, a slowing economy and the removal of extraordinary monetary stimulus, companies increasingly must stand on their own merits. Over the next several months, we believe downward revisions to earnings expectations could become the primary driver of equity performance. In an environment where earnings could matter more than Federal Reserve policy, stable, profitable growth stocks are well positioned.
- Growth stocks tend to not need economic growth to sustain profits This is especially true for proven, credible innovators with low debt, healthy free cash flow, wide competitive moats and years of runway for their products and services. These are companies whose success or failure is largely self-contained and not dependent on external economic or market cycles. In fact, adverse conditions can often benefit them. For example, even in traditional value sectors like Energy, you’ll find growth-oriented companies poised to change their industries. One such company has created a game-changing process for storing and transporting liquified natural gas (LNG). As the world grapples with an energy crisis from the Russia-Ukraine war, this company can deploy quick start-up floating LNG units that can be up and running in a fraction of the time and expense required by traditional LNG infrastructure.
- Technology remains one of the greatest secular growth trends Consider just one industry: Software as a Service. We believe that SaaS will benefit from innovators willing and able to spend substantially on both R&D and efficiencies to create value for their own customers’ growth. For example, if consumer spending ends up reflecting diminishing consumer confidence, SaaS companies will become increasingly essential to any company that needs data-mining expertise to target prospects and understand existing customers’ preferences and spending habits to garner maximum revenue from them. Likewise, as consumers face inflationary pressures, they are using more of these software applications to uncover the best deals and discounts. All told, from the accelerating dominance of e-commerce to cloud computing to artificial intelligence to increasing connectivity to life-changing medical breakthroughs yet unknown, innovation will increasingly be a powerful driver for long-term growth.
- We anticipate a renewed initial public offering market According to Renaissance Capital, last year’s IPO market was one for the records, with 397 traditional IPOs priced in the U.S. and, per Bloomberg, another 558 special purpose acquisition vehicles—that’s compared to a 10-year average of 175 IPOs per year. Despite the concern over slowing economic growth, we expect that the 2022 IPO market, while substantially more subdued, will deliver high-quality prospects.
- There’s value in growth and small caps could be a particular beneficiary In light of the extreme pullback in the Technology/Biotech sector, valuations among high-quality growth stocks have been reset. Essentially, growth has entered deep value territory—small-cap growth stocks most of all—presenting another opportunity for growth investors.