As we head into year end, it's clear that 2022 will not go down in the books as a banner year for growth stocks. For example, the growth-oriented Nasdaq Composite and Vanguard Growth ETF are both down 27% year to date.
The silver lining is that after years of strong performance, 2022's sell-off hit the pause button and gives investors a chance to get on board some of these top growth stocks at lower prices before they return to their winning ways.
As we turn the page on 2022, here are three beaten-down growth stocks that look poised for better returns in the years to come.
1. Floor & Decor Holdings
Down 40% in 2022, Floor & Decor Holdings (FND 2.25%) certainly fits the "beaten down" moniker; yet, it's also a monster growth stock. Floor & Decor is a retailer that specializes in hard flooring products like tile, wood, and natural stone, and the stock is down at a time when the market has sold off anything housing-related.
Investors are understandably fearful about rising mortgage rates cooling down the housing market and inflation hurting consumer demand. This makes sense, but look beyond the narrative, and you'll see that Floor & Decor is growing right through the heart of this challenging period. During the second quarter, Floor & Decor grew revenue 26.7% year over year, right at the time when concerns about rising mortgage rates and inflation were reaching a crescendo.
Floor & Decor followed up on this with year-over-year revenue growth of 25.2% during the third quarter. The company has a long track record of growth and is closing in on 14 straight years of comparable store sales growth.
Floor & Decor is not growing at the expense of profitability. The company grew adjusted earnings per share at a 37.1% compound annual growth rate (CAGR) between 2017 and 2021.
The best may be yet to come as Floor & Decor continues to expand its store count. The company has grown from 83 locations in 2017 to 191 in 2022. Over the long term, management sees room for 500 stores in the United States.
Seeing that Floor & Decor has grown profitably and continued to increase same-store sales while growing from 83 to 191 locations so far, I believe that it can continue to grow profitably as the company grows toward 500 locations, at which point the stock could be worth considerably more than it is today.
2. Silvergate Capital
Like Floor & Decor, Silvergate Capital (SI) is a stock that continues to post strong growth despite the market turmoil surrounding it, but shares of the California-chartered bank are down 83% year to date.
Silvergate is a regulated, FDIC-insured bank that makes loans and provides other services to the crypto industry. Exchanges like Coinbase rely on its Silvergate Exchange Network to settle trades efficiently and to enable the transfer of U.S. dollars to and from customers, so Silvergate is like a pick-and-shovel play on the crypto space as a whole. Silvergate has grown revenue at a 31.3% three-year CAGR between 2018 and 2021.
Top cryptocurrencies like Bitcoin and Ethereum are down significantly from their highs, and prominent crypto exchanges like FTX have filed for bankruptcy, so it is unsurprising that Silvergate has sold off. However, Silvergate has managed to grow earnings per share each quarter so far in 2022, from $0.47 during the first quarter to $0.85 for the second quarter and $1.28 for the third quarter. These strong results are all the more impressive against the backdrop of the crypto market's struggles.
Silvergate is profitable, and it trades at just 6.5 times earnings, indicating that much of the bad news from the crypto meltdown is already priced into the stock. With growing profits, a reasonable valuation, and an important role in the industry, Silvergate looks like an interesting beaten-down growth stock for risk-tolerant investors who believe in the long-term potential of cryptocurrency.
3. Dutch Bros
If you're seeking one more beaten-down growth stock, look no further than Dutch Bros (BROS -3.46%). Shares of the fast-growing drive-thru coffee chain are down 43% from their 52-week high as the market worries that inflation and rising gas prices will take a bite out of discretionary income for consumers.
Despite these challenges, the company is growing revenue 53% year over year. Dutch Bros has managed to increase prices 10.3% over a year ago without suffering from a decline in revenue, so the company's products are clearly in demand.
Dutch Bros is achieving this scorching revenue growth primarily by opening new locations at a rapid rate. The company has grown its store count by a remarkable 27% year over year and now has 641 locations. It opened almost as many shops in the third quarter alone as it did in all of 2019, so growth is accelerating.
This is impressive growth, but this could just be the tip of the iceberg. The company has its sights set on opening 4,000 stores in North America. If Dutch Bros can continue to grow toward this target, increase profitability as it scales, and increase same-store sales by upselling customers on customized drinks and leveraging its loyalty program, this beaten-down growth stock should evolve into a long-term winner.
This has been a challenging year for growth investors. But 2023 is just around the corner, and these stocks have shown that they can deliver growth in the midst of a challenging environment. Long-term investors stand to be rewarded for buying these beaten-down stocks before the market comes back around to them.