After a quick jump to start 2023, growth stocks are taking another turn lower. Wall Street's focus on short-term challenges like inflation and a potential recession has kept a lid on returns in the Nasdaq Composite, home to many of these growth-focused companies.
While prices have declined across the board, some discounts are more attractive than others because they apply to stellar businesses that can likely thrive through a wide range of selling conditions in 2023 and beyond. With that in mind, let's look at why you might want to add Palo Alto Networks (PANW -0.71%) and Lululemon Athletica (LULU 0.18%) to your portfolio.
1. Palo Alto Networks
Palo Alto Networks is giving growth investors a lot to celebrate in 2023. The cybersecurity specialist in late February announced that sales jumped 27% in its fiscal second quarter, preserving its excellent momentum from the 2022 calendar year. Cash flow and earnings remained strong, too, as the company balances growth with rising profit margins.
"Our focus on driving profitable growth is reflected in our Q2 results," CFO Dipak Golechha said in a press release.
Sure, the stock price incorporates much of that good news. Palo Alto's shares have trounced the market in 2023, rising by over 30% through late February. But the stock is still far from its all-time high and is lower over the past full year. Its valuation seems reasonable, too.
PANW PS Ratio data by YCharts
Investors can buy Palo Alto Networks for 9.5 times annual sales, or about the same price as Microsoft shares. The cybersecurity specialist is growing more quickly, though, and has a shot at sustainably boosting profit margins over the next several years. Sure, the risk level is higher for this less-diverse business heading into a potential slowdown.
But growth stock investors who can look past that short-term noise -- and focus on metrics like cash flow and market-share gains with this high-performing business -- should be rewarded.
2. Lululemon
It doesn't take much for a company to fall out of short-term favor on Wall Street. Lululemon's stock has declined nearly 20% since the company issued its third-quarter earnings update in early December.
That announcement showed strong sales growth, expanding margins, and encouraging progress in the athleisure giant's push to extend into new demographics, geographies, and product lines. Wall Street instead focused on the fact that inventory levels looked high heading into Lululemon's Q4 period.
Investors have since learned that the company did face rising profit pressure this quarter. Management lowered its 2022 gross profit margin outlook in early January.
But that update also included a modest boost to the sales forecast, suggesting that Lululemon's challenges aren't being driven by collapsing demand or a bloated inventory level.
Investors will get much more clarity on this issue when the company issues its Q4 report in March. But in the meantime, you can grab this stock at a solid discount while keeping your focus on Lululemon's bright multi-year outlook. In a few years, there's a good chance you'll look back and be glad you added it to your portfolio following this more challenging period for the company.
