Santa came early this year for growth stocks. The existing December rally accelerated on news that the Federal Reserve will likely begin cutting rates next year. And to be clear, growth stocks are most impacted by higher rates. These companies tend to be smaller and need debt to expand their operational reach. As interest rates rise, debt costs become prohibitive to these growth stocks, stalling expansion and pushing share prices down.
At the same time, since they’re younger and often unprofitable, growth stocks are a very speculative investment and investors expect returns to beat safer alternatives. When rates are higher, the risk-free rate is higher and investors can generate substantial yield through bond laddering and similar strategies.
But we seem to have hit an inflection point that could mean the bear market is over for speculative growth stocks. Still, don’t start throwing cash at every opportunity that comes. Due diligence principles still apply.
To find the best growth stocks to buy, look to companies suppressed by short-term news that nevertheless have great long-term prospects.
ChargePoint Holdings (CHPT)
ChargePoint Holdings (NYSE:CHPT) raced other growth starts to the top during this week’s rally, positioning the electric vehicle (EV) charging stock for a comeback in 2024. Just one month ago, CHPT cratered on poor earnings. A 12% revenue drop and double-digit negative margins sent shares down nearly 40%. But, in just a few days, CHPT is nearly back to its pre-earnings pricing on the Fed’s dovish outlook.
Despite its national dominance, ChargePoint is still in an expansionary phase as it spreads charging infrastructure globally. As you can imagine, negotiating with landowners and then developing and maintaining a range of EV chargers is extremely expensive. As interest rates rose, debt costs became prohibitive, forcing ChargePoint to slow its takeover campaign. And, of course, tightened household budgets put a halt to EV adoption trends.
But the Fed’s implied rate cuts negate both downsides. We’ll likely see EV adoption ticking back up as car loan rates come down. At the same time, ChargePoint’s financial strategy over the high-rate period positioned it well for what’s to come. The company operated mostly on cash, not touching a $150 million revolving credit account and delaying its earliest debt maturities to 2028. That means ChargePoint can quickly begin accumulating cheaper debt to expand, setting this growth stock up for a record year.
RocketLab (RKLB)
RocketLab (NASDAQ:RKLB) shares tumbled this fall as the space stock had a catastrophic mission failure, losing 40% of its market cap in a few short weeks. But that failure seemed to be a one-off scenario, and RocketLab’s future looks bright. This small-cap space stock is on track to beat other growth stocks as shares begin soaring in 2024.
This week, RocketLab hit a major milestone as it launched its 42nd rocket and 10th for 2023, beating its previous annual record. Today, RocketLab’s Electron rocket stands as the second most launched rocket nationally (behind SpaceX). Likewise, the company’s launch queue for 2024 is already full, meaning RocketLab’s growth strategy paid off and positions it for further expansion.
Space is set to be a $1 trillion industry, and RocketLab is one of the few publicly traded companies best positioned as a pure-space play. Better yet, though still in its infancy, RocketLab’s developing hypersonic flight platform could herald the much-awaited sea change in commercial and tourism flight. This catalyst would turn RocketLab into the biggest thing since cars replaced the horse and buggy.
Planet Fitness (PLNT)
Planet Fitness (NYSE:PLNT) shares are down about 10% this month as a series of poor earnings and worse guidance put pressure on the company. But, among the other growth stocks listed, PLNT stands to gain the quickest in 2024. The reason, of course, is New Year’s resolution time is upon us. Losing weight and other fitness goals make up the vast majority of resolution goals. At the same time, households are still watching their budget (alongside their weight), so Planet Fitness’ value pricing makes it ideal for those wishing to balance both objectives.
After a string of disappointments, PLNT’s most recent earnings also signaled shifting winds for the growth stock. Profit climbed 45% year-over-year, and management revenue forecasts for the year’s end pushed higher to 14% annual growth. Before that earnings report, in September, the company’s board ejected former CEO Chris Rondeau from the seat. We still don’t know the reasoning behind the move, and the company hasn’t yet brought a new executive on board. But, considering the stock’s performance prior to his ouster, it’s safe to say that fresh blood could put the growth stock back on track.
On the date of publication, Jeremy Flint held no positions in the securities mentioned. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.