The rebound off the mid-June lows has fizzled over the past three weeks as the S&P 500 is down a bit more than 7% from its recent highs. I would love to say now is the time to do some major bargain shopping, but I still find little compelling in this market. I am keeping my focus primarily on value stocks, which should hold up better in the recession I see coming by the first half of next year at the latest.
Even with the recent pullback in the markets, there are few growth stocks I want to step up and buy here. The global economy is clearly cooling and Europe looks like it is heading toward a long, dark winter that will be dominated by energy rationing. My guess is that large-scale demonstrations and protests in many countries will be common in the months ahead. US multinationals will need to look elsewhere to find a growth engine and earnings from Europe are going to continue to be dinged by a strong dollar.
With the Federal Reserve set to hike interest rates once again this month, the discount rate used to value growth stocks will continue to rise, which will further erode valuations. Even not taking rate hikes into consideration, some growth stocks already look stretched despite the recent decline in the markets.
Take Palo Alto Networks (PANW) , a leading cybersecurity concern. Palo Alto Networks is a well-run company that should deliver 25% sales growth in fiscal 2022 and just over 20% in fiscal 2023 according to current projections, with similar gains in earnings. That's nothing to sneeze at in the current slow-growth economic environment. But am I willing to pay 58x this year's earnings estimates and 8x sales for that growth? That would be a big "nyet." One could look at a competitor such as Fortinet (FTNT) that is "only" priced at 45x this year's projected profits and 11x sales and has a similar growth profile -- and that is after the stock has taken a 27% haircut so far in 2022.
If we were back in the zero interest rate world with solid global economic growth prospects, you almost could be talked into paying these sort of valuations. But that is not the cards investors have been dealt right now. Therefore, there is a dearth of well-known growth names in my portfolio at the moment. I also continue to maintain a significantly higher-than-normal cash allocation. Most of my holdings are within covered call positions; many involve index ETFs and value names such as Merck (MRK) and Bristol-Myers Squibb (BMY) that are reasonably valued and pay3% dividends to boot.
