After a tough 2022, the market offered us a glimmer of hope recently. The three major indexes rallied in the first month of the year. And that's got all of us ready to welcome the next bull market. Are we being too optimistic? I don't think so. Here's why.
Bear markets generally last about a year. But whether this particular market slump turns out to be a bit shorter or a bit longer won't change one important point: Bull markets always follow bear markets. That means better days are ahead, and it's not too early to prepare. The idea of a bull market makes me think of growth -- and therefore growth stocks. Should we return to these players that the market battered last year? Let's find out.
Turning away from growth
It's not surprising that some investors turned away from growth stocks as the economic situation deteriorated. In troubled times, investors favor companies that are less sensitive to higher costs and consumer spending. They go for steady companies selling products people can't avoid buying. So drugmakers or makers of consumer staples may benefit -- and their shares may outperform the market. We saw that happen last year.
This left growth stocks in the dust. Many sank in the double digits, reaching dirt cheap valuations. Now, let's consider whether we should jump back into these players today. First, it's important to say that as a long-term investor, it really isn't necessary to jump out of these stocks when times are tough -- unless you've lost faith in a particular company's story.
If you invest for a period of at least five years, you probably will go through periods of market gains and market losses. It isn't a good idea to change strategies every time the market shifts. Instead, it's better to construct a general strategy that suits your investment style -- and make adjustments when opportunities arise.
Consider investment style
By investment style, I mean your comfort with risk. If you're OK with some risk, you might favor growth stocks no matter what the general market is doing. Your decision to buy these stocks should be based on their valuations and on their long-term prospects.
Today, it just so happens that many growth stocks are trading for a steal and still offer great potential over time. It's the perfect moment to add some of these players to your portfolio. This is what I mean by making adjustments when opportunities arise.
For example, Amazon (AMZN -1.64%) is trading around its lowest in relation to sales since about 2016. The company is struggling with higher costs right now, but it's taking measures to weather the storm and come out stronger. And it remains a leader in the high-growth industries of e-commerce and cloud computing.
Another possibility is Tesla (TSLA 12.06%). The electric vehicle leader has actually thrived in spite of economic headwinds. In the fourth quarter, Tesla posted record revenue, operating income, and net income. And in the full year, net income on a GAAP basis more than doubled to $12.6 billion. At the same time, the stock is trading at about 50 times forward earnings estimates -- down from more than 80 a year ago.
Teladoc is at its cheapest ever
Teladoc Health (TDOC -0.07%) is a great healthcare growth stock. This leader in telemedicine sank last year after reporting goodwill impairment charges linked to an acquisition. But the company has made progress in narrowing its loss. Sales and virtual visits have steadily climbed in the double digits. And Teladoc has continued to win over new members. Today, the stock is trading at its cheapest ever in relation to sales.
TDOC PS Ratio data by YCharts
There are plenty of other examples across industries of cheap growth stocks that make great buys now.
All of this means you should buy growth stocks today, if they fit into your investment strategy. Even though we don't know exactly when it will arrive, a bull market is coming. It's never too early to invest in stocks that may flourish in this environment -- and, even better, offer you growth over time.
