| As we round the last corner of 2021 and near the two-year anniversary of the pandemic, our monthly reports from the BLS continue to bring us consistently higher inflation numbers, outrunning the expectations of many, and even forcing Jerome Powell to retire the adjective he assigned it. Inflationary fears can sometimes make it feel like we're headed for a "no fun zone" in the near future—a market where growth stocks may suffer due to correctional measures taken by the Fed. It makes sense on the surface, but could we be overgeneralizing a bit? Probably. Growth themes and inflation Growth companies tend to increase their earnings and revenues at a faster growth rate than the average business within their industry. Conventional wisdom says that inflation significantly hurts such companies, particularly those that have yet to fully mature. While there may be numerous reasons and situational factors that can lead to this, it often comes down to a domino effect of concerns. Inflation can hurt growth businesses if they're in sectors with less demand elasticity, rendering them less likely to raise prices to maintain margins and doubly, having to pay more for their products (the PPI was up 8.6% in October). Ultimately though, inflation's impact depends on the business. The main concern, applicable more broadly to almost all growth stocks, is the fact that when inflation is overextended, we can expect rising interest rates. Rising rates increase a business' cost of borrowing, which could erode future profits—a big selling point of companies that fit this description. But, there's hope to be found As some investors have been ramping up on value stocks, which are expected to perform better when the Feds tighten up on their monetary policy, conventional wisdom isn't always the wiser sometimes. While these concerns are valid, there are usually exceptions to the rule. So, if you're not ready to give up on growth investing just yet, here are a few key points to keep in mind: - Growth for the long haul: If you're a long-term investor, buying into a company you know will play a big role in the future of an industry isn't very worrisome even with inflation concerns. Consider the business' competitive advantages and the size of the market it's in. Industries like big data, cleantech & energy, and trends towards automation and smart factory tech provide a myriad of long-term growth opportunities. 💡 Related fund ideas*: Robo Global Robotics & Automation Index ETF ($ROBO), Global X Future Analytics Tech ETF ($AIQ), ProShares S&P Kensho Smart Factories ETF ($MAKX), First Trust NASDAQ Clean Edge Green Energy Index Fund ($QCLN)
- Pricing power: Does the company have the ability to increase prices easily? And can they actually take on more business while managing their expenses in inflationary times? Take American Express as a simple example. They handily increased their Platinum credit card annual fee from $550 to $695. And since they charge merchants a percentage of consumer transactions, they stand to benefit as the price of goods increases.
- Growth companies with a low cost of sales: Companies with less recurring product expense reduce their vulnerability to the impacts of inflation on their cost basis which increases their ability to absorb any hit to their profit margin because of their already lower expenses. Marry that with higher year-over-year sales growth, and you may have a winning recipe. And of course the caveat here is that this depends highly on the business as well as their specific product lines and their discipline around how they spend their money. 💡Fund ideas*: American Century® STOXX® U.S. Quality Growth ETF ($QGRO), Invesco S&P SmallCap Quality ETF ($XSHQ)
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