The Nasdaq has been one of the worst-performing stock markets globally over the past year. In fact, the index dropped a huge 33%, meaning that more than $5trn has been wiped out of the growth- and tech-focused index.
Like many investors, I am wary of US listed growth stocks in 2021 as valuations rise. And that strategy paid off. However, with valuations looking more attractive, I’m looking to see if I can take advantage of the Nasdaq correction.
Downward pressure on growth
Growth stocks, in general, became very expensive in 2021. And this, combined with a surge in US treasury yields, led to a sell-off that led to growth and technology stocks, which are valued in future earnings more than other sectors. .
However, the macroeconomic environment remains challenging for growth stocks in 2022. We are currently seeing a contraction in economic activity around the world, which is likely to lead to recession in many countries, and this has hurt some of the biggest growth stocks. Amazon and map has tanked over the last month. So have hard techs Tesla and NIO.
Growth stocks trade with large multiples. But now valuations look more attractive, even if that, in part, reflects the dark economic climate.
For example, Li Auto now trades with a price-to-sales ratio (P / S) of three – it’s just a fraction of what it was last year. A year ago, Amazon had a P/S ratio of four, while the current ratio is only 1.7 – a metric calculated by taking the company’s market capitalization and dividing it by the company’s total sales or revenue over the past 12 months.
exchange rate issues
Despite the tough economic climate, I think now is a good time to invest in carefully selected growth stocks. However, there is another challenge. And that’s the exchange rate.
The British Pound is currently equal to 1.14 US Dollars. That’s down a lot from this time last year – about 20%. And this means buying US stocks is more expensive than usual – assuming stock prices remain constant. It’s also a problem because if the pound appreciates – and in the long term I hope that happens – it could wipe out my profits.
What should I buy?
The correction clearly indicates an opportunity despite challenges related to exchange rates and an unfavorable economic outlook. I see more hard tech than soft tech.
I think that Chinese EV manufacturers, including Li Auto, have fallen far enough. This Nasdaq-listed stock also has other challenges, and that’s the Covid-induced lockdowns, but this won’t last forever, for sure. Li could become the second EV producer to turn a profit, after Tesla. That’s why I bought it.
I also keep a close eye Novavax. The biotech is down 88% for the year, even more than its peak. However, it has a forward P/S ratio of less than one, and Covid-related revenue should boost new product development.
article Stock market turmoil: can I take advantage of the Nasdaq correction? appeared first in The Motley Fool UK.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. James Fox has a position at Nio Inc. The Motley Fool UK has recommended Amazon and Tesla. The views expressed in the companies mentioned in this article are those of the author 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 variety of insights makes we are better investors.
Motley Fool UK 2022