Buying Growth Stocks – The Q1 2022 Update
I’m buying growth stocks again!
If it’s your first time here, I have two portfolios, one focused on growth and another focused on dividend growth payers. The growth one is more actively managed while the dividend portfolio simply tracks the S&P 500 Aristocrats index so it’s still more of an passive based investing style. This update tracks a small-ish percentage of my overall investments as most of my money is in boring ol’ reliable index funds and in tax-advantaged accounts.
Now that the background is out of the way, let’s jump into the update.
It’s been a rough few months for growth investors as certain stocks have been absolutely slaughtered and that includes a bevy of names in my growth portfolio. You can see the path my that growth portfolio took below. That’s the one year view which showed a big dip at the start of the year then a recovery towards April. The one year return is slightly negative despite how the graph looks as the totals include a bevy of purchases at the start of this year.
I mentioned in some previous updates that I was slowing my purchases in my growth portfolio since the stocks there seemed a bit frothy and I was certainly proven right. I don’t try to time the market so I wasn’t selling but I was pushing contributions into my dividend names over growth simply because they seemed more reasonable.
The problem with growth was that it was so often priced to perfection. As an economy, we came out of the pandemic into a post-pandemic world that priced certain names with the assumption that the recovery would be easy and things would keep moving smoothly on the economic front.
Plenty of stocks were sitting at 20x+ sales multiples which assumed growth would never slow down and things would keep roaring.
Well, some other shit happened. Inflation boomed, the fed started raising rates, a war broke out, earnings weren’t as rosy as expected and suddenly these 20x+ multiples fell off a cliff.
It wasn’t crazy to see 50%+ drops in a matter of weeks. As a growth investor, that stung, but as a long term investor, I was happy to see names I bought at reasonable multiples get back to somewhat reasonable multiples. It mean I could start buying growth stocks again.
It’s always nice to see your stocks soar as they did when I first started this growth portfolio but I knew that if I wanted to hold these names for decades, it didn’t make sense to buy more at those prices. SE was a good example of that, I bought it at $50 at the start of 2020 and within a year it was at $200. Less than a year later, it was at $350.
I thought their earnings were good but not THAT GOOD but prices kept moving and SE wasn’t the only one to see that type of upward movement. It was mostly crazy multiple expansion and while that’s good for short term traders, it sucks for long term investors because buying at those expanded multiples means lower long term returns.
And that’s not what I’m searching for. I want long-term compounders and that means buying them at reasonable valuations and benefiting from earnings growth and maybe small multiple expansion across the years.
When those multiples expand five fold in a matter of years, that means all that compound growth has been captured within a year or two. For me, that meant, I had to stop buying and wait for those multiples to shrink back to reasonable levels.
Unfortunately, for short term inventors, that shrinkage happened pretty fast. SE is down 62% in the past six months and it’s not a unique scenario. Plenty of names have followed the same path even more household names like PayPal which is down 54% in the same period.
However, it wasn’t a complete meltdown across the board. After all the Nasdaq is flat in the last 6 months and only down 10% year to date as some of the bigger names like Apple, Microsoft, Amazon and Google held up relatively well in this tech sell-off.
That’s mostly because their valuations didn’t soar to ridiculous levels and investors continued to value cash generation in a market that had become increasingly speculative. That meant moving out of those smaller cap stocks with big multiples and into more “safe” haven names like Apple.
After all, there’s uncertainty in the air. Inflation is 8%+, rates are rising and it’s unclear whether or not the fed is doing enough to control it, there’s a big terrible war out there and the supply chain issues continue to be a problem and I’m sure more heinous shit is happening too. It’s not crazy that people want to invest in stocks that are a bit more safe.
Certain stocks might be down 50%+ and the Nasdaq might be down 10% since my last update but the S&P is only down about 3.4% and that’s after a 4.1% bump in the last month.
My dividend portfolio is actually in the positives since the last update after a solid month.
Usually when there’s a small correction, there follows a recovery and we’ve seen both sides of that story play out pretty quickly. Sure, some of these smaller cap growth names have been left a bit behind but overall things aren’t looking that bad right now from an investment standpoint. However, it’s still unclear what’s ahead.
While the S&P has done better, the PE ratio there is still at 26X and the Schiller PE is north of 36x. While that still looks good against a 10 year rate that’s sub 2.5% especially in an inflationary environment, it’s hard to say whether that 10 year rate stays there long if inflation continues to be a problem.
There’s a flight to safety now which in my mind is leaving some of these long term growth names undervalued from a long term perspective which is why I’m putting more money these days but it’s unclear what that means from a short term perspective.
What I mean is that despite me putting money into growth, I don’t believe that growth names are more insulated from a fall than stocks in the S&P 500. If the fed raises rates at a faster pace, if there’s an economic shock and maybe even a recession, everything will fall like a stone at these valuations, that’s just how markets work.
However, that’s a big if, as it always is and I’m not one to bet on that. Hell, we just had a big ol’ war in Europe and while it felt like the end of the world at first, it seems like the market has moved on and things are looking rosy there again with a few weeks of positive returns.
As was the case after the big fall and fast recovery in March when the pandemic felt like the end of the world, it just feels weird. However, I guess I sort of get it.
After all, we’re in a world where inflation is high, cash is losing 8% every year and bonds pay 2% so where else should you put money except stocks, and maybe real estate or Crypto?
For me, I’ll be buying growth stocks more so than dividend payers and recent returns and what they mean for valuations are part of that.
Now that we’ve gotten past my thoughts on the market, let’s look at where the portfolio sits today in relation to the last update.
As a reminder, the portfolio sat at $84,577.98 as of 11/24/21.
The Q1 2022 Portfolio Update
As of 4/3/2022, the portfolio sits at $82,031.93. That’s down from 3% from the last update which doesn’t seem that bad but it does include nearly $5,000 in new contributions which makes it a good deal worse.
As you can see, the biggest dip comes from the growth portfolio which has taken quite a beating while the aristocrats portfolio actually grew despite much lower contributions in that period.
This has not been a great market for growth investments as evidenced by the big dip in that portfolio. In fact, since the last update, my growth portfolio is down a whopping 17.4% when you remove contributions. That’s worse than the 10% drop from the Nasdaq and much worse than the 3.4% drop from the S&P 500.
That’s what happens when you have some riskier names and aren’t as overweight the large cap tech names like the Nasdaq.
On the opposite side, the Dividend Aristocrats portfolio is actually up 0.5% since the last update, a testament to the defensive nature of those types of stocks. People will always lean towards stocks with a proven record during difficult times and 25 years of constantly raising dividends is certainly one way to prove yourself.
Overall, the portfolio was down 9% in this period which is worse than the S&P 500.
When you have a period like 2020 and 2021, it can sometimes be easy to forget why people want to invest in anything but growth but a few months like we had this year serve as a good reminder to the risks that are inherent in such stocks. The growth is amazing but the pain when that growth fizzles out can hurt a little bit too. That’s especially true if you buy in near the top and not before the massive run-up.
That’s why I like having two portfolios which aren’t as correlated to each other. Whereas before I was buying more aristocrats, in recent months and even now I am buying more growth stocks because I find more value there.
In my mind, some of these stocks have gotten fairly valued again and I’m not upset about the lower prices from a long term perspective.
I’ve also made a few changes to the portfolios as well.
On the dividend aristocrats side, I follow the S&P 500 Dividend Aristocrats index which meant I added BRO and CHD and removed T. The former hit their 25 year mark of raising dividends and T was removed since they failed to raise their dividend and are actually cutting it going forward due to their warner/discovery merger. I don’t track these changes on the spreadsheet because these are not active moves but ones that simply mirror what the index does.
On the growth side, I made small changes to the pies(which are all listed under portfolio moves in the google spreadsheet for those interested), removed NVTA and STNE and added UPST to the portfolios. I do think there’s some very solid values out there and have made some changes to the individual stock weightings in the various pies to capture them in future buys.
When growth was down heavily earlier this year, I was heavily buying the growth side of things. I will continue to do so right now but am still tying in the Dividend Aristocrats as well now that growth has spiked a bit.
One of the key questions is how does this portfolio compare against the index especially after a tough period for growth. I do think it’s often tough to beat the index against a long period of time which is why most of my money remains in index funds. This portfolio isn’t overly active either as I don’t make massive changes too often.
However, this still remains a fun little side car in my investing path and is certainly about more than just beating the index. However, I’ll keep track of that as always to see how things are going.
Performance Against the Index
Overall, I’m still up against the index despite a rough few months. In November, I was up nearly 11% and now I’m back down to just north of 3% outperformance.
Whether or not the S&P 500 is the comparable index is another question but it’s the simplest thing to compare against. The interesting thing is that now it’s entirely the Dividend Aristocrats that are driving outperformance whereas before it was my growth stocks.
It’s interesting to see how quickly that can turn around and I’m certainly glad I’m not fully invested in growth right now whereas a few months ago I was probably complaining about how my investments in these boring dividend stocks are keeping my returns down.
Speaking of dividends, it’s also nice to see those numbers growth even if the portfolio has a few negative months.
I talk about the bigger impact my M1 accounts have in my monthly dividend updates and you can see those numbers grow above. I was just shy of $1,000 in dividends in these accounts last year and should eclipse that number easily in 2022.
Overall, the start of 2022 has been a negative one for investors especially those with a focus in growth but it hasn’t been as bad as I expected. It seems like any dips whether in 2020 or 2022 have been quick to recover and investors haven’t really felt the sting of a prolonged recession.
It’s always tough to tell what’s ahead but with all the crap going on in the world and the inability of the fed to continue pulling rabbits out of their hat(after all, they can’t just print more money right now), it wouldn’t be crazy if we finally saw a recession and a tough market, something we haven’t really experienced for an extended period since 2008.
It’d be something to test the mettle of many investors.
For now, I am keeping a bit of extra cash on the side but I am still buying growth stocks and will continue putting more money into these accounts. We’ll see what’s ahead and I’ll be back with another update after Q2.
Disclosure : I am long all stocks mentioned in this post and reflected in the attached video/spreadsheet. Note investing comes with risk of loss and you should discuss with a qualified investment advisor before investing your own money.