Though the benchmark equity indices have made some robust moves recently, their performance since the beginning of the year remains negative, with growth stocks underperforming. Nevertheless, for contrarians willing to ride out potential turbulence, there may currently be an opportunity to steadily acquire positions while stock prices are relatively cheap.
For one thing, buying growth stocks following a correction theoretically expands investors’ return potential. Starting from a lower threshold, they will have more runway to work with than those buying shares at higher valuations. As well, the law of small numbers – the concept that higher-magnitude gains are easier to achieve from lower starting points – may provide them with a tailwind.
Secondly, U.S. equities generally have an upward bias. Partly due to the massive size of the U.S. economy and the dollar’s status as the world’s reserve currency, it’s good to be an American investor. Therefore, those investing in U.S. stocks can be fairly confident that even beaten-down growth names can rebound if they’re tied to fundamentally sound businesses.
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A computer software firm that specializes in myriad applications, ranging from office-specific platforms like Acrobat Reader to solutions for creatives such as the ubiquitous Photoshop, Adobe (NASDAQ:ADBE) is a familiar name to anyone who has pretty much done anything with a modern computer. Still, the year hasn’t panned out for Adobe the way its management hoped.
First, there’s the little matter of ADBE stock not doing so well. On a year-to-date basis through the Aug. 5 session, Adobe was down 23%, a tad more than the Nasdaq Composite, which was down 20% during the same period.
Second, analysts have taken a dim view of the company’s full-year guidance, which fell short of their mean expectations. Unfortunately, the miss more than offset the firm’s strong fiscal second quarter, which featured a beat on the top and bottom lines.
However, Adobe can still be one of the best growth stocks to buy following a correction, in part because of its undergirding of the micro-gig economy. Essentially, as people return to the office, more folks will rely on “side gigs” to supplement their income, and that phenomenon can really help Adobe.
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While arguably everyone will agree that the coronavirus pandemic represented a net negative for the world, it did present some silver linings. One of those was the creation of the work-from-home trend. Suddenly, cubicle or office-tethered employees got a taste of a work-life balance that actually favored the workers.
Therefore, it’s not terribly surprising that a great many employees – specifically half of them, according to a BBC.com report – would rather resign from their positions than go back to their offices. I can’t say for sure how this burgeoning battle between employees and employers will pan out. But if many people do end up quitting their jobs, Intuit (NASDAQ:INTU) could be a beneficiary of that trend.
Yes, the software company – which specializes in tax-related tools– has seen its shares erode by 27% in 2022. But as millions of fed-up employees transition to “Form 1099” independent contractors, many of them will be confused by the new tax rules that they will have to follow.
Intuit helps make the pivot to freelancing an easier process. That’s why it’s one of the best growth stocks to buy on weakness.
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On the surface, cybersecurity firm Fortinet (NASDAQ:FTNT) looks like an easy choice for this article. While securing computers and networks from online threats has always been a relevant endeavor, today’s digital crimes are incredibly sophisticated. For this year, experts in the field estimate that the average cyberattack in the U.S. will impose an economic burden of $9.5 million.
With Fortinet focusing on preventing such problems, FTNT stock should be soaring, right? Unfortunately, that’s not the case, as its shares are down 26% in 2022. Although Fortinet delivered strong Q2 results– it beat analysts’ average earnings, revenue and billings estimates – its management provided mixed guidance for Q3. Its shares quickly tumbled on the less-than-confident outlook.
Still, the bears’ pessimism may be overdone. Again, cybersecurity has always been a relevant issue, but the problem now is that hackers are becoming much more sophisticated. With attacks such as phishing and ransomware, there are more ways for hackers to hurt individuals and entities than ever before. As a result, at some point, FTNT stock will likely make a big comeback.
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If you know anything about the U.S., you know that Americans love their pets. According to the American Pet Products Association, consumers in this country spent $123.6 billion last year on their furry friends. Most of this amount –$50 billion — was devoted to food and treats.
Further, the sales of supplies, live animals, over-the-counter medicine, veterinary care, and other product came in at $64.1 billion. Finally, a segment called “other services” – which include boarding and grooming – rang up $9.5 billion.
However, what Americans apparently don’t care for is Chewy (NYSE:CHWY) stock. The shares of the pet supplies retailer are down 19% in 2022,. Nevertheless, Chewy may be one of the best growth stocks to buy following a correction.
One very positive factor for Chewy is the balanced demographics of pet owners. While millennials dominate at 32% of the category, baby boomers and Generation X are no slouches, accounting for 27% and 24%, respectively. Thus, Chewy has a large total addressable market that over time can overcome the red ink that it’s spilling now.
Five Below (FIVE)
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Fundamentally, discount retailer Five Below (NASDAQ:FIVE) would seem to be an ideal play during these strange times. A step above the “pure” discount dollar stores, Five Below offers genuine deals relative to pricier big-box retailers and caters to families on tight budgets. Nevertheless, FIVE stock has given up a rather worrisome 32% of its market value since the start of this year.
The culprit was its disappointing guidance. In conjunction with the company’s fiscal Q1 report, its management stated that it expects full-year earnings per share of $4.85 to $5.24, down from its previous guidance of $5.19 to $5.70, according to Barron’s. On the top line, the company expects between $3.04 billion and $3.12 billion, below its previous guidance of $3.16 billion to $3.26 billion.
The company cited a tough macro environment as the reason for the drop in its outlook.
Analysts at KeyBanc stated, however, that they remain “positive on the [company’s] long-term story, with compelling product, new price points, and improved experience — along with strong store growth —supporting FIVE’s long-term performance.” In other words, if you’re going to speculate on beaten-up growth stocks, give Five Below careful consideration.
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To lay out the case that Alarm.com (NASDAQ:ALRM) is one of the best growth stocks to buy following its correction, I’m going to turn to an academic expert. Specifically, Richard Rosenfeld, a professor of criminology at the University of Missouri-St. Louis, told Business Insider that “property crime would jump this year as rising prices push consumers into the black market.”
Interestingly, Rosenfeld stated that while some shoppers will switch from Target (NYSE:TGT) to Dollar Tree (NASDAQ:DLTR), others will switch from Dollar Tree to more illicit sources. The professor stated that as “retail prices rise, we see people trading down to the underground market and stolen goods.”
“That generates higher demand in those markets to supply them with goods acquired through robbery and property crime, and we see robbery and property crime rates increase,” he added.
Invariably, that situation will create demand for security systems such as those offered by Alarm.com. Providing solutions for the home, small and medium-sized businesses and large companies, the company effectively offers its customers peace of mind.
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A few months ago, the Wall Street Journal revealed that the average age of vehicles on U.S. roadways had hit 12.2 years, representing a new record high. The finding isn’t surprising, since the soaring inflation rate has particularly affected high ticket items like used cars. Consequently, many people are choosing to hold onto their vehicles until their wheels fall off.
A beneficiary of this crisis may be CarParts.com (NASDAQ:PRTS), one of the more speculative but intriguing growth stocks to consider following a correction. While its shares are down about 29% in 2022, its business is fundamentally relevant. Again, with a record number of people using very old vehicles, the parts department’s phone is metaphorically ringing off the hook.
To be fair, the firm’s outlook is tricky because in many cases, a car gets so beaten down that it’s better to replace it than to keep repairing it. However, if the economy worsens, many people might not have the luxury of buying new vehicles, making the company one of the better growth stocks to speculate on.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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