It's been a challenging year for investors, with the S&P 500 index down more than 22%. In such an environment, growth investors inevitably may ask whether it's time to start loading up on some growth stocks like Tesla (TSLA -3.40%). Here are some thoughts on the matter.
What happened in 2022
Going into 2022, the general narrative around the market was as follows:
- Raw-material cost inflation would persist but ease in the second half as supply chain issues ironed out.
- Smoothing supply chain issues would ease cost pressures -- with no more high spot prices for components or transportation.
- In concert with an opening of the economy, labor shortages would ease alongside a gradual easing of COVID-19 restrictions.
- Strong demand, rising backlogs, and price increases would lead to stronger substantial profit margins in the second half.
That was the game plan. However, as Mike Tyson famously observed, everyone has a plan until they get punched in the mouth. The unfortunate reality is that raw material prices remain elevated, supply chain pressures persist, and companies struggle to secure components. Labor shortages are ongoing (witness the high-profile issues at airports); COVID-19 lockdowns have continued longer than most expected (notably in China), and Russia's invasion of Ukraine (along with the policy response to it) has exacerbated many of these issues.
The year in charts
These adverse developments have caused a slew of full-year guidance earnings downgrades. Given the persistence of these headwinds, it's reasonable to expect more to come in the second-quarter earnings season.
It gets worse. The persistent inflation caused the Federal Reserve to hike interest rates. It was a move widely anticipated by the market, and as you can see below, market rates (the 10-year Treasury) increased, taking mortgage rates higher too. That's bad news for interest rate-sensitive sectors like housing and autos.
Data by YCharts
What does this mean for Tesla?
Industry analysts have rushed to downgrade global industry production forecasts in 2022 due to supply chain pressures. Tesla is not immune to such challenges, and there's an open debate on whether the company will meet its target of 1.5 million units in 2022. And in a leaked email, CEO Elon Musk appeared to call on employees to rally back from a tough second quarter. After only 305,000 units were produced in the first quarter (and possibly fewer in the second quarter), Tesla's target goal is in question.
Also, Tesla is in one of the interest rate-sensitive sectors mentioned above. Rising interest rates will inevitably make it harder for consumers to take on debt to buy electric vehicles.
The case for buying growth stocks like Tesla
That said, there's still a robust case for buying growth stocks, Tesla included.
First, the Federal Funds rate hike appears to have taken some speculative fervor away from commodities investors. The Thomson Reuters/CoreCommodity Commodity Research Bureau (TR/CC CRB) index follows 19 commodities, including aluminum, copper, and other industrial metals; precious metals; crops; livestock; and energy commodities.
As you can see below, although still at relatively high levels, it's corrected slightly. Moreover, as the economy continues to open up and labor shortages get ironed out, the supply chain issues will likely ease eventually.
Data by YCharts
Second, just as the bond market wasted no time in pricing higher rates, the stock market sell-off means equities look like a much better long-term value than in January.
Third, growth stocks like Tesla will, by definition, generate the overwhelming bulk of their earnings in the future. Therefore, investors shouldn't overly stress over one year's earnings or failure to meet production targets.
Fourth, Tesla is a growth company with relatively secular growth drivers (not reliant on economic growth). Indeed, many investors favor it precisely because it sells EVs and therefore has an opportunity to outgrow light vehicle sales growth significantly.
Time to buy growth stocks?
Suppose you believe that these trends -- higher inflation, interest rates, mortgage rates, and supply chain issues -- will persist. In that case, you'd want to stay away from growth stocks because their outlooks would be muted. And that would include Tesla.
However, if you believe the economy will muddle through and supply chain issues will eventually ease, then it's an excellent time to get exposure to growth stocks like Tesla.
History suggests that the economy will muddle through, but the upcoming second-quarter earnings season will likely feature a slew of earnings downgrades. As a result, cautious investors might want to wait until it's over before trying to find an entry point. However, if the "muddle through" thesis is correct, the recent dip looks like a good buying opportunity.
