2 growth stocks I wouldn’t touch with a barge pole

Jon Smith reviews two growth stocks with a large presence in the UK that he thinks could struggle with the recession looming.

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Growth stocks have endured a tough 2022. Cuts to global economic growth expectations have pushed shares lower as investors tried to reassess what 2023 and beyond looks like. For some companies, I feel that the coming years won’t be that bad, due to the sector operated in. However, there are some firms I think could really struggle, based on what I’ve seen this year. Here are two examples that are flashing warning signs to me.

I can see what time it is

The first company I’m not keen on is the Watches of Switzerland Group (LSE:WOSG). The share price is down 36% over the past year.

Even though the financial results this year haven’t been bad, I think investors have seen past the short term and are looking at what demand could look like in 2023. Luxury watches are expensive, and unlikely to be in high demand as the UK stays in a recession over the coming year.

In the recent trading update, the business commented that “demand remained strong through the quarter and continues to exceed supply”. Yet my concern here is that watch manufacturers (alongside other industries) have been struggling with supply chain problems. If this starts to ease next year then we could have a large flush of supply but lower demand. This is the worst kind of mix to have.

Finally, the business opened five new showrooms in H1 2022. With most retailers struggling to attract footfall, I don’t see this as a smart move. Rather, I think the company should invest more in the digital side.

For the moment, results are strong. If the revenue and profits continue to improve, the share price could rally next year. This is especially true, given the current depressed level, potentially attracting value buyers.

A growth stock that’s stalling

The second company I won’t invest in is JD Wetherspoon (LSE:JDW). The stock has dropped by a chunky 51% over the past year.

As one of the leading pub brands in the UK, the company struggled over the pandemic due to restrictions imposed by the government. However, even in the last financial year, the business posted a loss, despite most restrictions being lifted in that trading period. This doesn’t fill me with confidence.

Even when I look forward to next year, I don’t feel that the business will outperform. In a cost-of-living crisis, people are going to cut back. One area will be in eating and drinking out. Why spend a premium to do this when I can buy cheaper produce at the supermarket and eat/drink at home?

Granted, Wetherspoons has the advantage of being priced at the low end of the range when it comes to affordability. Drinks and food are cheap here. This should cushion the fall in demand, as people might still find the money to visit the pub.

On balance, I think the risk versus reward for this growth stock doesn’t add up. I think there are much better options for me to consider elsewhere.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

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