The market’s winds have changed direction over the past few weeks. Up until recently, growth stocks were in the doghouse as investors fretted about falling revenue growth rates and mounting layoffs in the technology industry.
But now, Wall Street’s worries have turned to the banking sector. A series of major banking failures in March have provoked panic across the financial sector.
This is a blessing in disguise for growth stocks. For one thing, analysts are starting to predict that the Federal Reserve may let up on its rate hikes given the abrupt drop in confidence in the banking system.
Additionally, interest rates have tumbled in recent days as investors head to the safe haven of government bonds. As much of the drop in growth stocks was seemingly linked to the rate hikes, suddenly falling interest rates could lead to a sizable rebound in growth stocks. At minimum, we could be set for an improvement in sentiment for growth stocks, with these seven well-positioned to benefit.
Datadog (NASDAQ:DDOG) provides cloud monitoring and security functions via software-as-a-service solutions. Datadog’s appeal lies in its all-in-one platform.
In other words, DDOG’s clients can monitor and secure their servers, workflows, databases, and their other IT hardware from one central location. In contrast, traditional solutions are compartmentalized, creating potential blind spots and vulnerabilities. Having all these functions in one place makes it easier for firms’ IT professionals to look at everything simultaneously.
Datadog has been one of the industry’s most remarkable success stories. The company grew revenues from a modest $101 million in 2017 to $1.7 billion in fiscal year 2022, with revenues expected to hit $2.1 billion this year. And analysts expect the company to keep growing at around 25% per year going forward.
Datadog is already profitable, which sets it ahead of many of its software-as-a-service company peers. And DDOG stock is a bargain as shares have slumped in recent days, pushing it to near 52-week-lows.
Sociedad Quimica y Minera de Chile (SQM)
One of the megatrends for the 2020s will be the electrification of the transportation sector. Many investors participate by owning electric vehicle stocks, which is totally understandable. However, there is a good deal of competition there, and the car business tends to have low profit margins as well.
Another angle is to buy the proverbial picks and shovels to the electric vehicle industry. The most obvious pain point is in batteries, and, in turn, in lithium. Lithium prices surged to record highs in 2022 amid heavy buying from China and a lack of adequate supply from miners.
Chile is one of the world’s leading sources of lithium, and it tends to be safer and more economically stable than most other countries with ample lithium reserves. And Sociedad Quimica y Minera de Chile (NYSE:SQM) is the dominant player within Chile.
Recently, SQM stock has pulled back around 20% amid fears of a slump in demand as China’s economic reopening demand fell short of expectations. A global economic recession would ding short-term demand for electrification solutions, and thus lithium batteries, in the near term.
For longer-term investors, however, the opportunity is here with SQM stock selling for 5 times forward earnings and offering a double-digit earnings yield. Additionally, SQM grew revenues from $2 billion in 2019 to more than $10 billion last year. This is a growth stock and a value stock rolled up in one.
Dutch Bros (BROS)
Dutch Bros (NYSE:BROS) is a small, rapidly growing coffee-shop chain. The firm is aiming to disrupt Starbucks (NASDAQ:SBUX).
Starbucks has long dominated the American coffee market with its sit-down café experience. However, the pandemic changed people’s relationship with coffee shops and caused many to reimagine their daily routines.
Meanwhile, demographics are also changing. Starbucks does well with millennials and older consumers. However, Dutch Bros wisely figured out that Gen Z — aka the “zoomers” — might want something else.
Dutch Bros has ditched large stores, instead choosing tiny locations designed to support take-out customers. In addition, Dutch Bros focused on sweet, colorful beverages that look good on social media.
The company has also made a point of hiring personable, engaging staff. Starbucks has had labor problems including a nasty public relations fight and nearly 280 Starbucks stores experiencing union fights so far. Dutch Bros could have an advantage with its better workforce relations.
Dutch Bros only has 671 stores as of year-end 2022. It’s still a minnow compared to Starbucks. However, Dutch Bros plans to grow to at least 1,000 locations in coming years, and that growth could lead to an excellent trajectory for BROS stock.
Clearfield (NASDAQ:CLFD) is a small company servicing the broadband industry market. It offers fiber protection, management, and delivery services. To put it simply, Clearfield is a central provider of the tools and services that telecom companies need to deploy broadband solutions in large quantities.
Clearfield has been an exemplary growth story over the past few years. Its revenues soared from $93 million in 2020 to $271 million last year. Clearfield was a beneficiary of the stay- and work-from-home trends that we saw since 2020. Faster internet speed was integral in making that digital learning and working environment possible.
However, that tailwind has started to sputter out, and traders have dumped CLFD stock as a result. Indeed, shares are down from a 52-week-high of $135 to just $50 today.
At this price, CLFD stock is now going for just 11 times forward earnings. That’s a bargain. And the growth story remains strong as well. Analysts see Clearfield’s revenues continuing to grow at 20% a year or more, annualized, through at least fiscal year 2025.
Visa (NYSE:V) is one of the two dominant credit card companies globally. This has been a tremendous business for decades as more and more areas of the global economy have ditched cash for plastic. This adoption accelerated during the pandemic as people rushed to employ touch-free payments and e-commerce solutions as compared to existing options. Both of those were favorable for Visa’s business.
Visa has also benefitted from the rapid restart of global travel and tourism. That’s because Visa enjoys much higher profit margins on cross-border payments which involve foreign exchange.
V stock trades around 25 times forward earnings, which is a lower multiple than it usually traded for prior to the onset of the pandemic. It’s a reasonable price for a company that is expected to grow both revenues and earnings at a double-digit annualized pace going forward.
Visa should also serve as a safe haven within the financials sector. As traders dump bank shares amid the various problems facing that industry today, much of that capital should rotate into more secure options in the financials industry. Visa takes no credit risk on transactions and doesn’t have a complicated balance sheet to worry about. That should reassure investors.
Adobe (NASDAQ:ADBE) is the long-time leader in graphics software. It has industry-leading software tools such as PhotoShop and Illustrator. Adobe tools are virtually irreplaceable in fields such as marketing, illustration and graphic design.
In recent years, Adobe has started to widen its moat by expanding past just graphics. Adobe has been buying other pieces of software in efforts to build a content cloud for creative professionals.
Adobe’s Acrobat has been a big winner; it has grown to a $2 billion per year business as PDF signing took off in recent years. Recent acquisitions such as Magento and Marketo have furthered Adobe’s budding creative cloud with tools such as marketing automation.
Going forward, it seems software-as-a-service companies need to build a broad platform of services rather than offering a single tool or utility. Adobe has been a leader in this field. Meanwhile, its dominance in the core graphics category ensures that Adobe’s overall user base will remain sticky and engaged.
And with the selloff in the tech sector, ADBE stock is now a bargain. Shares trade for just 23 times forward earnings. And analysts anticipate that top-line revenues will keep growing at around 10% per year despite the brutal slowdown elsewhere in the tech industry.
Unity Software (U)
Unity Software (NYSE:U) is the operator of a leading graphics engine. Developers use the company’s graphics engine to design and run video games. While Unity was created to power the video gaming ecosystem, it has broadened its reach in recent years into video animation, architecture, and e-commerce.
Unity, along with its key rival, Unreal, control the majority of the video-game-engine market. It’s difficult for other companies to take share from Unity as many developers have become accustomed to using its platform.
Unity’s claim to fame is that its engine works seamlessly across platforms. A developer can build a game for, say, PCs, and then easily release that same game for use in conjunction with consoles, mobile, and even virtual/augmented reality.
In fact, Unity has long been a leader in developing graphics for virtual reality apps. Mark Zuckerberg reportedly wanted to acquire Unity years ago to serve as the core of its planned virtual reality operations. That acquisition could have come in handy, given how much Meta Platforms (NASDAQ:META) has spent trying to build its own metaverse recently.
The metaverse concept became the object of satire last year. However, FB stock has mounted a major recovery in recent months. It’s quite possible that the obituaries for virtual reality and the metaverse were written prematurely, in which case U stock could enjoy a substantial run as well.
On the date of publication, Ian Bezek held a long position in U, FB, and V stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Artificial Intelligence, Cloud, Communications, Consumer Discretionary, Financial, Fintech, Restaurant, Retail, Semiconductor, Software, Technology