Trading Desk: Growth Is Back

Believe it or not, growth stocks are finally getting some traction again on Wall Street. Evidently the Fed’s aggressive tightening cycle and even a recession are already baked into the market at this point.

And what’s left behind is a lot of room for truly dynamic stocks to rally. Just don’t look for the usual trillion-dollar suspects to lead the way.

Amazon (AMZN) earnings dropped like a rock in the pandemic and remain on the floor. Maybe next year we’ll see the bottom line start climbing again . . . but even after the split, $0.56 per share just doesn’t look great stretched across a $100 stock at any positive growth rate.

At least Tesla (TSLA) is growing fast enough to theoretically justify up to a 135X multiple over the next few months. The problem here is where that growth rate goes in 2023 and beyond. Wall Street currently projects about 50% earnings expansion in the coming year . . . good, but even under ideal conditions getting close to fairly valued.

Apple (AAPL) is no longer an exponential growth name either. Tim Cook’s accounting wizardry adds up to roughly 20% higher earnings on a per-share basis every year until the cash runs out. Again, that’s enough to support the stock here but not necessarily to incite a buying frenzy.

Microsoft (MSFT) isn’t much better. Alphabet (GOOG) is worse. I’d much rather buy PayPal (PYPL) at barely 19X earnings against a long-term 20% growth trend . . . that stock is rarely so cheap.

Either way, 20% growth isn’t extraordinary, especially when you consider that the S&P 500 is on track to grow 10% this year. The bar is set relatively fast. To justify a higher multiple, you need to be truly spectacular.

Look down the food chain for that. Paycom (PAYC) makes payroll software. Simple, small, streamlined. They’re expanding profit 64% this year and are looking at 16% growth at least going into next year.

There’s a reason that little stock has rebounded 21% in the last three weeks. Real growth stocks have bounced about 7% over that period but are still down 27%, so there’s plenty of room for the recovery to play out.

Value is up only 3.5% from its low. Those stocks were defensive but it takes a lot of fear to get them moving. Growth is where the future is.