Growth stocks have looked particularly weak over the last month amid fears of a hawkish Fed, and those fears came true yesterday when the U.S. central bank announced its policy decision. While it kept rates unchanged, as was widely expected, the dot plot showed only two rate cuts of 25 basis points each in 2024 - which is half of the previous projection.
Also, the median projections showed Fed fund rates at 3.9% at the end of 2025, which is 50 basis points higher than the previous projection. In a nutshell, the Fed’s September meeting reaffirmed the “higher for longer” sentiment as it looks to tame inflation.
Growth Stocks Have Fallen as Interest Rates Rise
Growth stocks are usually at the receiving end of selling pressure when interest rates rise. Since most of their earnings are skewed towards the future, these profits become less valuable in current dollar terms as they are discounted at a higher rate – and in this case, we are talking about rates not seen in over two decades.
Cathie Wood of ARK Invest is among the most well-known growth-oriented fund managers. She rose to fame in 2020 as her funds outperformed the markets by a wide margin. To her credit, she was among the early backers of names like Tesla (TSLA) and Block (SQ), and is known to back up her portfolio companies and buy the dip even when they are out of favor with the wider markets.
However, Wood’s investing strategy has also received some criticism, as most of her portfolio holdings have underperformed markets over the last two years. Her flagship ARK Innovation ETF (ARKK) lost over two-thirds of its value last year - and despite the rebound in 2023, it still trades at a quarter of its 2021 highs.
Meanwhile, even as some of the companies in ARK ETFs are trading near their 52-week lows amid the slump in growth stocks - and the Fed’s hawkish stance signals further troubles on the horizon - I believe Teladoc Health (TDOC) and SoFi (SOFI) are two Cathie Wood stocks that look like good buys at current levels.
Teladoc Health Stock Is Trading Near Its 52-Week Lows
This week, Wood bought more shares of Teladoc Health as the stock fell to 52-week lows. TDOC peaked at around $295 in February 2021, and has been sliding since - including a 74% fall in 2022. It is in the red for 2023, also, and it's underperforming the Nasdaq Composite ($NASX) by a wide margin.
The stock has been out of favor with investors, and posted massive losses in 2022, driven by billions of dollars in write-downs. However, I believe this underperforming growth stock looks like a good buy now.
Teladoc Health has built a strong ecosystem of 12,000 clients and around 86 million members. While membership growth has tapered down, the vast base represents a massive cross-sell opportunity for Teladoc Health.
TDOC Looks Quite Undervalued
Analysts expect Teladoc’s revenues to rise in the high single digits in 2023 and 2024, but I believe there is an upside to these estimates as the company expands internationally and looks for more cross-sell opportunities - plus, expands to a weight-loss segment – which should help propel its revenues.
And despite posting GAAP losses, Teladoc has been posting positive free cash flows, and even raised its 2023 free cash flow guidance to $150 million. The stock looks undervalued by most metrics, and its next 12-month (NTM) price-to-sales multiple of 1.24x is at all-time lows. The NTM enterprise value-to-earnings before interest tax, depreciation, and amortization (EBITDA) multiple of 12.1x and NTM market cap to free cash flow of 13.4x are also on the lower side.
I believe attractive valuations and a reasonably strong growth outlook make TDOC an attractive buy at these levels.
SoFi Forms Part of Wood’s Fintech Innovation ETF
Fintech company SoFi is a part of the ARK Fintech Innovation ETF (ARKF) - and while some of Wood’s favorite names are sagging near 52-week lows, SoFi is up 73% this year and is outperforming the S&P 500 ($SPX) by wide margin. However, the stock has come off its 2023 highs amid the slump in growth stocks, and I believe it makes sense to buy the dip in this Cathie Wood stock.
Why SoFi Stock Looks Like a Good Buy
SoFi is among the rare former special purpose acquisition companies (SPACs) that hold long-term promise. It is still growing at a brisk pace, and added over 584,000 new members in Q2 2023 – a new record that took its total member count to 6.2 million, and an increase of 44% compared to the corresponding quarter last year.
Along with its multiple fintech products – which create cross-selling opportunities into its burgeoning user base – SoFi also has a bank that gives it access to low-cost funds. Incidentally, SoFi has grown its top line without compromising on credit quality and profitability, and its delinquencies are lower than they were before the COVID-19 pandemic.
While the company is positive on an adjusted EBITDA basis, it expects to become profitable on a GAAP basis in Q4 2023. The resumption of student loan repayments should be another boost for SoFi, and help propel its student loan refinancing business - which was almost dead over the last two years, due to the moratorium on repayments.
The stock looks attractive from a valuation perspective, and trades at an NTM price-to-sales multiple of 3.45x. While growth stocks might continue to feel the pinch from rising interest rates, I believe SoFi looks well positioned, and is among the Cathie Wood stocks that look like good buys at these levels - especially for patient investors looking to stay invested for the long term.
On the date of publication, Mohit Oberoi had a position in: SOFI , TDOC . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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