Investors fearing high inflation and rising interest rates are abandoning well-known companies that grow earnings faster than the overall market and command premium prices and valuations. Latest victim: Netflix, which has plunged about 70% in 2022 amid a dip in subscribers. Just to get back to year-start levels, its stock would need to climb more than 200%.
What to do: Don’t dump all your growth stocks. Instead, limit how much of your overall portfolio you devote to them (start with no more than 5% for any stock), and monitor these warning signs that a blow-up is possible…
Your stock has nosebleed valuations: If a stock is priced for perfection, the slightest falter in performance can send investors stampeding for the exit. Compare its forward price-to-earnings ratio (P/E) and price-to-sales ratio (P/S) to competitors, as well as the S&P 500, which has a P/E of 18 and a P/S of 2.6.
Your stock is overhyped: Is it being touted on CNBC and discussed at every social gathering?
Three growth stocks with flashing yellow lights now…
Microsoft (MSFT) has reinvented itself as a leader in cloud computing, but it has a market capitalization of $2 trillion while being valued as if it were a small-cap. P/E: 25. P/S: 10.7.
Tesla (TSLA). CEO Elon Musk has become the world’s richest, most talked-about entrepreneur. His effort to buy Twitter may prove a distraction at a time when every car manufacturer is gunning for Tesla’s electric-vehicle business. P/E: 60. P/S: 13.9.
Chipotle Mexican Grill (CMG). Post-pandemic diners are flocking to restaurants, but the chain may find it difficult to pass along higher costs to customers. P/E: 41. P/S: 5.1.