Warren Buffett has outperformed the market year-on-year and is known as one of the greatest investors of all time. One of Buffett’s most famous quotes is “be fearful when others are greedy, and greedy when others are fearful”. I feel this advice can be followed when considering growth stocks at the moment. Indeed, while many such stocks soared during 2020 and the start of 2021, they have since declined rapidly. Indeed, the Nasdaq index, home to many technology stocks, has fallen around 17% from its recent highs. But as Buffett states, this may be a good time to be greedy.
Why have growth stocks fallen so significantly?
There are a few reasons why growth stocks have fallen so heavily in the past few weeks. Firstly, there have been issues over the valuations of these companies, and many believed that they were in a bubble. For example, at its peak, the Nasdaq had an average price-to-sales ratio of over 6. This was far higher than pre-Covid levels, where the average P/S ratio was just around 4.5. This demonstrated that a bubble had started to emerge, and it was always likely to burst at some point.
Secondly, and potentially most importantly, inflation has caused havoc among growth stocks, most recently reaching over 7% in the US. High inflation has already led to the Bank of England raising interest rates, and the Fed is expected to do so multiple times throughout the year. One reason why growth stocks were able to rise so significantly during the pandemic was due to the low-interest-rate environment. This is because it was extremely cheap to borrow. Therefore, higher interest rates are a major fear among investors at the moment, and a reason why there is so much nervousness in the markets. It is also a major risk in each of the following companies that I’m buying.
What am I doing?
There is no doubt that these are extremely serious risks, and some expect that growth stocks will continue to fall. However, through following the advice of Warren Buffett, I feel that now is a good time to be greedy. This is because the recent crash has led to several discounts in quality companies, which present some great buying opportunities.
For example, the Latin American e-commerce company MercadoLibre has been growing revenues at rates of around 80% per year and is on track to reach $7bn in revenues this year. Despite this, the shares have dropped 50% over the past year to below $1,000. For me, this is an excellent company I’ll continue to buy on the dip.
Teladoc is another growth stock that seems too cheap, currently trading below $70. It has not been this price since 2019. However, since 2019, revenues have quadrupled, in part due to the boost of the pandemic. Therefore, this is another stock that seems too cheap, and I’ll continue to buy.
In terms of UK stocks, I like Darktrace, the cyber-security firm. This has recently dipped to below 400p and is near its IPO price. Even so, revenue growth for the next financial year is expected to be around 43%, and cyber-security is a growing industry. Personally, this recent price drop offers a great opportunity to buy.
Stuart Blair owns shares in Darktrace plc, MercadoLibre and Teladoc Health. The Motley Fool UK has recommended MercadoLibre and Teladoc Health. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
