The last 12 months have been difficult for investors looking to build wealth. Rising interest rates have been weighing on share prices and growth stocks have been hit the hardest.
Lower share prices mean better buying opportunities, though. Buying shares at bargain prices has been the hallmark of all the most successful investors.
With interest rates at their highest levels for 10 years, I think growth stocks are unusually cheap. As the market shifts towards dividends, I’m looking for growth opportunities.
Interest rates
Before 2022, interest rates in the UK had been below 1% for over a decade. Last month, they reached 4%.
The process is similar in the US. Interest rates recently reached 4.75%, having previously been below 2.5% for the previous 10 years.
As buyers switch to dividend shares, the impact on growth stocks has been significant, sending their prices down. Shares that looked expensive a year ago, suddenly look more reasonable.
Tesla is one of the most obvious illustrations of this. Despite a recent rally, the company’s share price is still 40% lower than it was at the start of 2022.
Elsewhere, the story is the same. Over the last 12 months, shares of AirBnB (-32%), Spotify (-25%), and Zoom Video Communications (-47%) are all down significantly.
Buying opportunities
I thought a lot of more speculative stocks were overpriced at the start of 2022. Investors seemed to believe that low rates would last forever, which I felt was unrealistic.
Today though, growth stocks seem to be priced for the idea that interest rates will rise indefinitely. And I think that’s equally unlikely.
Back in 2016, Warren Buffett started buying shares in Apple investing a total of $31bn. At the time, the stock had fallen by around 24%.
Since then, the company has grown its revenues at around 10% per year and Buffett’s stake now has a market value of $161bn. I don’t have that much cash. But there’s a company on my radar that I think could generate a similar wealth-boosting return.
The stock is Guidewire Software . Since the business doesn’t yet turn a profit, the share price has been hurt by rising interest rates.
The company provides specialist software for insurance companies. Like Buffett’s Apple investment, it has a dominant position in its industry, a lot of room for further growth, and low capital requirements.
Despite this, the stock is 22% lower than it was a year ago — a bit like Apple shares were when Buffett bought them. With the underlying business growing at a similar rate, I’m looking for a similar return.
Risks and rewards
Investing in a growth stock like this can be risky. By their nature, they have expectations of higher earnings in the future built into their share prices today.
If those earnings don’t develop, then the share prices can fall dramatically. And higher interest rates make it harder for businesses to fund their way to profitability.
When things go right though, growth stocks can generate huge returns. The ability to grow by reinvesting earnings is one of the qualities Warren Buffett looks for in a great business.
With interest rates at their highest levels for a decade, I think that there are some attractive opportunities on offer right now. So I’m looking to be greedy while others are fearful.
