Growth stocks have fallen out of favor with investors in 2022 due to inflation, rising interest rates, and other headwinds. In this environment, many are instead seeking safety in value stocks and reliable dividend payers. But while focusing on quality income stocks can be a reasonable strategy for risk-averse investors, other folks may be interested in scooping up some beaten-down growth names.
In the views of three of our contributors, ChargePoint Holdings (CHPT), Autoliv (ALV 2.13%), and QuantumScape (QS 0.56%) stand out as quality growth companies worth considering now.
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Give your portfolio a jolt with ChargePoint
Daniel Foelber (ChargePoint): You would think that rising oil and natural gas prices would be a boon for the electric vehicle (EV) industry. After all, the last time oil and natural gas prices were in the range they've been in recently was around eight years ago. Back then, a big selling point for EVs was the idea of saving money on fuel. Today, electric vehicles are more efficient and less expensive.
However, supply chain snags, rising costs, and lower consumer spending are major near-term headwinds for the EV industry. An added long-term concern is its reliance on the specific raw materials needed to make batteries. As electric vehicle production grows, the demand for batteries grows with it. It seems like the global supply chain is not yet ready for a major transition from the internal combustion engine to the battery-electric motor. And those concerns, combined with rising interest rates, inflation, and other challenges, are weighing on the EV industry.
ChargePoint, the leading EV charging infrastructure company in North America and a major player in Europe, isn't concerned with near-term headwinds. It's playing the long game by building relationships and constructing the best charging network it can for residential, commercial, and fleet customers.
ChargePoint reported its fiscal 2023 first-quarter results on May 31 -- and they did not disappoint. For the period, which ended April 30, revenue was up 102% year over year. But its gross margin shrank to 15% -- down from 23% in the prior-year period. What's more, ChargePoint is still losing money. And it doesn't expect to break even on the operating cash flow front until fiscal 2025 at the earliest.
Management believes aggressive investments are needed to capture and hold a leading position in the EV charging niche. That bold strategy will come under pressure if the U.S. economy enters a prolonged downturn.
Despite the risks, ChargePoint stands out as one of the best EV stocks on the market. It has a fantastic management team that, although ambitious, deserves a lot of credit for being up front with investors about its spending plans, its market strategy, and its long-term vision for profitability. ChargePoint isn't a cheap stock now. But it sports a market cap of just $4.9 billion right now, and it's easy to imagine the company becoming much bigger in the coming decades as electric vehicles go mainstream.
Demand for safety in automobiles isn't going away
Lee Samaha (Autoliv): The situation couldn't get much worse for the automotive sector. Ongoing difficulties obtaining semiconductors have been joined by issues around obtaining copper wiring harnesses (Ukraine is a major manufacturer) and palladium for catalytic converters (Russia is a major palladium exporter). So, yet again, automakers face up to a year of diminished production capacity due to external factors.
That's not great news for auto parts suppliers like Autoliv. With a dominant 43% market share in passive safety systems (airbags, seat belts, and steering wheels), Autoliv's fortunes will always be tied to light vehicle production.
However, as the proverb goes, "the darkest hour is just before the dawn," and the reality is that the underlying demand for new cars remains strong. Once the supply chain issues and component shortages get sorted, there's highly likely to be a multiyear expansion in light vehicle production. (And those issues should get sorted -- the chipmakers that cater to the auto industry, for example, are investing massively in new production capacity.)
In addition, Autoliv is well-positioned to benefit as passive safety has generally outperformed the growth of light vehicle production over the last few decades. Moreover, as safety standards in the developing world rise to match those mandated in the developed world, Autoliv will have opportunities to increase its content per vehicle.
Instead of thinking of the auto sector as being perennially challenged by events, investors should take the "glass half full" view, recognize the multiyear growth opportunity ahead, and pay heed to the fact that Autoliv is well-positioned to benefit.
Building a better EV battery
Scott Levine (QuantumScape): With the S&P 500 and Nasdaq Composite down about 13% and 22%, respectively, since the start of the year, investors don't have to look hard to find discounted growth stocks. But finding unstoppable growth stocks trading at a discount -- that can be tougher. One such stock that investors will want to consider is QuantumScape.
The company is focused on developing solid-state batteries for use in electric vehicles. And compared to the lithium-ion batteries that power them now, solid-state batteries offer several advantages, including the ability to charge faster and provide greater range.
But QuantumScape is still in the pre-revenue phase -- it's currently developing prototypes of its batteries. In fact, management doesn't expect to begin commercial manufacture of its solid-state batteries until 2024.
Even though it has some road to travel before it can begin to generate sales, QuantumScape has convinced some prominent partners to come along for the ride. Recognizing the significant potential of the solid-state battery solution, Volkswagen has been collaborating with QuantumScape since 2012. In addition, QuantumScape has inked agreements with two top-10 original equipment manufacturers -- one of which has expressed interest in forming a joint venture with it. And EVs aren't the only market for QuantumScape's innovative power solution. The company has also partnered with Fluence Energy, which hopes to use solid-state batteries in its energy storage applications.
Currently priced at around $12, shares of QuantumScape appear to be in the bargain bin considering that they've traded between $10 and $43.08 over the past year. It may take a few years before QuantumScape's solid-state batteries start rolling off the assembly line, but when they do, investors may be looking at some electric returns.
