Falling stock markets give us the opportunity to buy shares in good companies cheaply. Right now, growth shares have suffered some of the biggest falls. Does that mean we should focus on them particularly?
Well, I do think growth shares still face short-term risk. And I reckon some falls, in part, represent long overdue price corrections. But I have my eye on a few growth prospects this month.
Buy Nasdaq?
When I think growth shares, the US Nasdaq index comes to mind. That index has slumped from a high of 16,212 in November 2021 to 10,575 as I write. That’s a whopping 35%. But how can we take advantage?
The clear choice for me is Scottish Mortgage Investment Trust (LSE: SMT). Scottish Mortgage shares have crashed by an even bigger 52% over the same timescale.
Falling further than the US technology index, the investment trust is now on a discount to net asset value of 12.4%. That means we can buy Scottish Mortgage shares for that much less than the value of the investments it holds.
The top 10 holdings currently include Moderna, Tesla, Amazon, and NIO among other popular Nasdaq and worldwide technology stocks. There’s clearly a risk of further short-term falls. But I think Scottish Mortgage is an attractive way to invest in a basket of global growth stocks.
Cybersecurity
I’ve been intrigued by cybersecurity specialist Darktrace (LSE: DARK) ever since it crossed my radar.
Darktrace hit the headlines and soared. But it looked very much like a hot growth stock that was overhyped and overvalued. Some short sellers took note and joined the party, and a number of analysts were very critical.
But moving forward to today, we see a 70% share price fall since last year’s peak. And the short sellers are gone. Darktrace shares did jump briefly in August when a possible offer for the company emerged. But that came to nothing and the price fell back again.
Would I buy now? I really don’t know. The company is only just into profitability, and financial ratios don’t mean much now. Forecasts, for example, put the shares on a price-to-earnings (P/E) multiple of over 110.
Revenue growth looks strong, and I am tempted. But I’ll probably wait until I can convince myself that profit is sustainable.
Engineering
I’ve watched Melrose Industries (LSE: MRO) on and off quite a lot over the years, but have never bought.
Melrose buys up struggling engineering firms, turns them around, and then sells them. But engineering is not the most in-favour sector with UK investors at the best of times.
And after the latest stock market downturn, the Melrose share price has now fallen 40% in 12 months.
Due to the nature of the business, with long cycles between acquisitions and disposals, year-on-year earnings can be erratic. And analysts don’t expect another annual profit until 2024.
But we’re looking at a price-to-book ratio of only around 0.6 now, valuing the company at just 60% of its assets. But there is a good bit of risk in going for engineering investments when facing the possibility of a painful recession.