I don’t regularly invest in growth stocks, instead I prefer dividend stocks that provide me with a regular source of income. After all, its worth remembering that many growth stocks fail, so it’s not always worth taking that risk.
Instead, I carefully pick my top growth stocks, looking at their performance, valuation, and the trends on which their growth is dependent.
Why now?
Growth stocks tanked at the end of 2021 and into 2022. January’s growth/tech sell-off came on the back of a surge in US Treasury yields. This hurt more expensive growth stocks that are valued on expectations for future earnings. Growth stocks often trade with very high price-to-earnings (P/E) multiples, or if they’re not profit-making, high price-to-sales (P/S) ratios.
Despite a few small surges, growth stocks are yet to properly recover. One reason is that interest rates have been rising and this increases the cost of growth. So, right now, it can be wise to look at growth stocks with few debt obligations and plenty of cash.
Pick no. 1
Li Auto (NASDAQ:LI) shares jumped last week on hopes the Chinese government would consider relaxing Covid-19 restrictions. But as those hopes died this week, the share price slumped again.
The Chinese electric vehicle (EV) manufacturer is among three highly promising outfits, but Li could be the first to turn a profit despite facing challenges this year. Li Auto’s delivery growth tanked in 2022, delivering just 4,571 EVs in August.
The 56% month-on-month drop-off in deliveries was put down to Covid-19 and supply chain restraints. The government’s zero-tolerance approach really has slowed down the industry’s growth this year.
However, more positively, Li’s L9 model — which was long awaited — looks set to disrupt the EV market. The $70,000 SUV comes with two electric engines and one petrol, providing a 1,100km driving range. Containing a wealth of tech, including sizeable infotainment displays controlled by 3DToF hand/finger tracking cameras, the car is being promoted as the best SUV anywhere on the market.
The firm is currently trading with a P/S ratio of just three — Tesla‘s P/S ratio is 10 — and looks cheap compared to other US peers.
For me, the main factor holding Li back right now is Chinese lockdowns, and I just can’t see that lasting forever. As such, I’m buying Li Auto shares ahead of its growth into the global car market.
Pick no. 2
Somero Enterprises (LSE:SOM) manufactures laser-guided and technologically innovative machinery used in horizontal concrete placement. It might not sound phenomenally interesting, but it doesn’t need to be.
Such equipment plays an integral role in the construction industry, advancing productivity, concrete flatness and site efficiency. Moreover, despite being down 25% over the year, the US Congress recently passed the $1trn infrastructure investment bill. As such, the firm should have little trouble finding demand for its products.
Supply disruptions have been impacting non-US operations and, thus, the share price. But I don’t see this being a long-term feature. I’m buying Somero shares as I see the company playing an increasingly important role in the construction industry in the years to come.
