It takes nerves of steel to buy growth stocks right now! Here’s what I’m doing

It’s often the case that growth stocks get hit hardest when share prices fall sharply. And that’s been the case recently with the rising concern around artificial intelligence (AI) valuations. 

Not every stock that’s down is an opportunity. But some of them are, and I think there’s a real chance for investors who can figure out the difference. 

Falling knives

AI is clearly changing a lot for companies in the tech sector. And in a lot of cases, it’s making share prices go down as investors see threats to what looked like promising companies. 

One example is Duolingo (NASDAQ:DUOL). The stock is down 66% in the last six months, because investors are concerned about the threat of AI-enabled competitors.

The firm doesn’t look like going bust. But the stock was trading at a price-to-earnings (P/E) ratio of 268 a year ago, which implies huge growth that now looks less likely to materialise.

At a P/E ratio of 23, the stock looks more reasonable, but a discounted share price isn’t always an opportunity. Investors who need reminding can look at Peloton‘s performance over the last five years.

In other words, piling into stocks just because they’re down isn’t always a good plan. In a lot of cases, they’ve been falling because there’s a real chance their growth prospects are lower. 

This, however, isn’t always the case. The market is well capable of overestimating the threats a company is facing and when it does, there can be outstanding opportunities for investors.

Opportunities

Interestingly, I think some of the most attractive growth opportunities right now might be closer to home. FTSE 250 housebuilder Vistry (LSE:VTY) is one example.

After a series of profit warnings connected with internal costing errors, the stock is down 55% from where it was 15 months ago. But things should be starting to look up for the company.

The accountancy issues are likely to impact profits, but the effect should wear off by the end of 2026. And I’m not convinced this is being reflected in the share price.

Vistry has a different business model from most housebuilders. Rather than building by itself, it works with partners such as local authorities and housing associations. 

The risk with this is that it involves extra relationships that can potentially become strained. But the advantage is that it makes the company much more efficient than other builders.

With the effects of the recent problems starting to wear off, but the stock still some way from where it was, I think this is an opportunity. That’s why I’ve been adding to my investment.

Being brave

It takes courage to buy a stock that has been falling sharply. It’s a sign investors think there’s a problem with the underlying business and there’s rarely smoke without fire.

Sometimes, though, the fire isn’t as bad as the market thinks it is. In those situations, investors who know what they’re looking for can find outstanding opportunities. 

There’s always a risk of catching the next Peloton. But while Vistry has had big problems recently, I think these are coming to an end and this makes the share price a bargain.

The post It takes nerves of steel to buy growth stocks right now! Here’s what I’m doing appeared first on The Motley Fool UK.

More reading

• 2 growth stocks I’m backing to grow my ISA by 2030 
• Why the Duolingo share price just crashed 21%

Stephen Wright has positions in Vistry Group Plc. The Motley Fool UK has recommended Duolingo and Vistry Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

See author's posts