Finding the right growth stocks for a down market can be tricky.
The last 12 months have been challenging for equity markets. During this period, the S&P 500 index has declined by 13%. The impact on growth stocks has been severe with several high-flying names having plunged by more than 50%. There are growth stocks for a down market that have defied the broad-based correction.
Of course, there is an opportunity in growth stocks that have witnessed a deep correction. Stocks that have been resilient show robust fundamentals and attractive valuations. If growth stocks remained sideways or trended higher in a correction, the rally can be massive during a bull market.
It’s therefore a good time to screen and buy growth stocks for a down market. Particularly, companies that have the catalyst positive industry tailwinds in the coming years.
Let’s discuss seven growth stocks for a down market.
| ALB | Albemarle Corporation | $223.10 |
| PINS | $26.54 | |
| RIG | Transocean | $6.44 |
| LI | Li Auto | $25.36 |
| DOX | Amdocs | $94.90 |
| BORR | Borr Drilling | $7.72 |
| HL | Hecla Mining | $6.34 |
Albemarle Corporation (ALB)
Albemarle Corporation (NYSE:ALB) stock has remained sideways over a 12-month period and outperformed the S&P 500 index. At a forward price-earnings ratio of 7.3, the stock seems poised for a big rally once market sentiments improve.
Albemarle has been on a high growth trajectory as the company boosts its lithium conversion capacity. Last year, the company reported revenue growth of 193%. For 2023, Albemarle has guided for growth in the range of 55% to 75%.
I expect the momentum to sustain beyond 2023 considering the following fact. Albemarle reported lithium conversion capacity of 200ktpa at the end of last year. The company expects to increase capacity to 500ktpa to 600ktpa by 2027.
Cash reserves can finance growth if there are strong cash flows. The company’s credit metrics will remain strong and ALB stock has visibility for sustained dividend growth. If lithium prices continue to rise, cash inflows could be larger than predicted.
Pinterest (PINS)
Pinterest (NYSE:PINS) stock had witnessed a plunge from highs of February 2021. However, PINS stock has remained sideways in the last 12 months. This indicates the point that the worst is over in terms of downside.
My view is backed because business metrics are improving on a year-on-year basis. For Q4 2022, the company reported 4% growth in revenue and a similar growth in monthly active users. An important point to note is that it’s the fourth consecutive quarter of an increase in average revenue per user in U.S. and Canada. The same holds true for global ARPU.
However, the ARPU gap between U.S. and Europe is significant. The ARPU for the rest of the world was just 14 cents for Q4 2022. If the ARPU gap closes, there is significant scope for EBITDA margin expansion and cash flow upside.
This seems likely with Pinterest focused on making the platform shoppable. As advertising revenue increases, global ARPU is likely to remain in an uptrend.
Transocean (RIG)
Transocean (NYSE:RIG) stock is another name that has outperformed with an upside of 40% in 12 months. The offshore drilling rig service provider stock has remained resilient even with the recent correction in oil.
A big catalyst for Transocean in the last few quarters has been order intake. The company’s backlog has swelled to $8.5 billion as of February. Just to put things into perspective, the backlog addition in the first half of 2022 was $606 million. During the second half of the year, the backlog addition increased to $3.3 billion.
There are two positives related to the backlog. First, it provides clear revenue visibility for the next 12 to 24 months. New orders are at a higher day rate and EBITDA margin expansion seems likely through 2023.
Transocean is also targeting debt reduction of $3 billion through 2025. Given the backlog, this seems realistic. As credit metrics improve, RIG stock is likely to trend higher.
Li Auto (LI)
Over a 12-month period, Nio (NYSE:NIO) and XPeng (NYSE:XPEV) stock have declined by 55% and 60% respectively. During the same period, Li Auto (NASDAQ:LI) has declined by just 6%. The Chinese EV stock has outperformed peers and the broader market.
There are several fundamental reasons to be bullish on Li Auto. First, the company is on an aggressive expansion stage in terms of new model launches. In the first half of 2022, the company has one model, Li ONE. However, Li Auto currently has a pipeline of models that include Li ONE, Li L9, L8, and Li L7.
With the launch of multiple models, deliveries growth is likely to remain robust. The company has also been aggressively expanding its retail net work within China. It’s also worth noting that Li Auto ended 2022 with cash and equivalents of $8.47 billion. The company, therefore, has ample financial flexibility to invest in product development and retail expansion.
Amdocs (DOX)
Amdocs (NASDAQ:DOX) is another attractive growth stock for a down market. DOX stock has trended higher by 13% in the last 12 months. At a forward P/E of 16, the stock remains attractive and looks poised for further upside. The stock also offers an attractive dividend yield of 1.83%.
As an overview, Amdocs is a provider of software and services to the communication and media industry. Last year, the company reported revenue of $4.58 billion with 75% recurring revenue. As of Q1 2022, the company had a record 12-month backlog of $4.1 billion.
This provides clear cash flow visibility and the business model is attractive from that perspective. For 2022, free cash flows were $600 million and Amdocs expects FCF in excess of $700 million for the current year.
An important point to note is that Amdocs has been pursuing global diversification. Last year, the 60% of the top 10 customers were from outside North America. With 5G rollout acceleration, the global growth outlook is positive for the company.
Borr Drilling
Borr Drilling (NYSE:BORR) is another stock from the offshore drilling services segment that has defied the market trend. BORR stock has skyrocketed by 136% in the last 12 months. I believe that further upside is impending considering the growth outlook.
As an overview, Borr Drilling has 21 contracted jack-up rigs with another two under construction. Last year, the company reported revenue of $443.8 million. For the current year, Borr has guided for revenue of $760 million.
Borr reported adjusted EBITDA of $157.4 million in 2022. The company expects to deliver an adjusted EBITDA of $380 million for 2023. With a powerful surge in revenue and EBITDA, the outlook for BORR stock is positive.
The company added $1.7 billion in order backlog through 2022. A strong order intake in 2023 will be another potential stock upside catalyst. With positive cash flows in the coming years, I also expect the company’s credit metrics to improve.
Hecla Mining (HL)
Over a 12 month period, Hecla Mining (NYSE:HL) stock is another name that has remained sideways. If we narrow the time horizon to the last six months, HL stock has surged by 60%. This does not come as a surprise with precious metals back in focus.
As an overview, Hecla Mining is among the largest miners of silver in the United States. Currently, the company claims to be mining 40% of all silver produced in the U.S. However, the company’s asset portfolio is diversified with gold also contributing significantly to the revenue and EBITDA.
For 2022, Hecla reported $719 million in revenue and a free cash flow of $109 million. With precious metals trending higher, FCF is likely to increase in 2023 and that’s the reason for HL stock surging in the recent past. With Hecla Mining have production growth visibility, the benefit will come from higher production and better price realization.
On the date of publication, Faisal Humayun did not hold (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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