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Economics

Growth Stocks vs. Inflation: How Inflation Affects Growth

Let’s compare growth stocks vs. inflation, examine the current inflationary environment and discuss how you can navigate it to invest wisely.
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Growth stocks can represent some of the most exciting investment opportunities out there. This is because these young companies create an opportunity for outsized returns. Buying a reputable growth stock today could be like buying Amazon stock back in 2005. There’s just one problem. Right now, we are also in the midst of record-high inflation. Traditionally, inflationary environments are a bad time to buy growth stocks. So what should you do? Let’s compare growth stocks vs. inflation, examine the current inflationary environment and discuss how you can navigate it to invest wisely.

What Is a Growth Stock?

A growth stock is a share in a company that is poised to grow significantly faster than the overall market. Usually, these are young, exciting companies such as Airbnb, Uber, or Dutch Bros. Growth stocks typically have rapidly growing revenues, are unprofitable, and invest all their income into growing their business.

Here are a few common takeaways of investing in growth stocks:

  • Price appreciation: Investors buy growth stocks in hopes that their share price will increase at a rate faster than the S&P 500.
  • Richly valued: Analysts value growth stocks at many multiples of their earnings. This valuation is based on the company’s projected future earnings.
  • No dividends: High-growth companies prefer to invest money back into their business instead of paying dividends.

Growth stocks also typically rely on outside funding from investors. Since they are so young, they do not have large cash piles. Instead, they rely on venture capital, investment banks, or other investors to grow their business.

Now, let’s examine inflation and how it can impact growth stocks.

How Does Inflation Work?

Inflation is defined as the decrease in the purchasing power of money over time. Another way to describe this is “the steady increase in the price of goods over time”. Essentially, the world that we live in consistently becomes more expensive due to inflation.

There are plenty of real-world examples of inflation. When McDonald’s first debuted its Big Mac in the 1960s, it cost just 45 cents. Today, that same Big Mac costs $5.11.

Additionally, inflation isn’t just limited to Big Macs. It occurs in pretty much every single product category. The main reason that inflation occurs is that the Federal Reserve prints more money. As the money supply increases, the purchasing power of each dollar decreases.

The Current Inflationary Environment

Thanks to COVID-19 stimulus packages, we are currently experiencing the highest levels of inflation since the 1980s. At first, the Federal Reserve announced that this inflation was transitionary. They blamed the inflation on COVID-19 shutting down supply chains. However, high rates of inflation have persisted for several months now.

In May 2022, the rate of inflation sat at 8.6%. This means that the dollar is losing 8.6% of its value year over year.

To combat this rise in inflation, the Federal Reserve is increasing the interest rate. The interest rate is a tool that the Fed leverages to slow inflation. Raising interest rates makes it more expensive to borrow money and helps cool the economy. With that in mind, let’s examine growth stocks vs. inflation and how these two interact with each other.

Growth Stocks vs. Inflation

When we discuss inflation, we typically focus on how it impacts consumers. For example, higher prices at the grocery store squeeze consumers’ budgets. This makes it harder for people to afford groceries. However, this same scenario happens to companies. During periods of high inflation, it becomes more expensive for companies to manufacture goods.

For example, let’s examine a growth stock like Roku. Roku creates digital media players that plug into the back of a TV. These media players give customers access to streaming platforms. Higher inflation increase Roku’s manufacturing costs. This makes it more expensive for Roku to manufacture its media player. Since Roku is a younger company, it isn’t able to simply increase its prices to offset this rise in costs. Increasing prices could decrease sales dramatically. This puts Roku in a precarious situation.

Double Whammy

On top of higher production costs, growth stocks need to deal with higher interest rates. Increased interest rates hurt growth stocks in three ways:

  1. Cheaper valuations: Investors value growth stocks based on their projected future earnings. When interest rates are higher, investors reduce these projections.
  2. Less access to capital: Growth stocks require funding from investors to grow. When interest rates are higher, it becomes more expensive to borrow money. This means it will take longer for growth stocks to, well, grow.
  3. Transition to safer assets: Growth stocks are usually companies with relatively unproven business models. This inherently makes them riskier than assets like value stocks, bonds, or real estate. During periods of high interest rates, institutional investors tend to move their money out of growth stocks and into other assets.

Same Player, Different Team

Growth stocks vs. inflation can be a confusing topic. This is because investor sentiment changes incredibly quickly. In 2021, many growth stocks were flying high. Fast forward just one year, however, and these same stocks are down big. At the same time, not much has changed at these companies. So what happened? To examine this, let’s look at an analogy.

Imagine a star quarterback for an NFL team. This quarterback is dual-threat and prefers to scramble and create plays on his feet. Sports analysts love him and he is very well paid. However, his contract ends and he gets traded to a team that runs a pro-style offense. This style of offense doesn’t complement the quarterback’s skills. For this reason, he likely won’t perform as well over the coming years. Even though the quarterback has the same skill level, analysts start to change their opinion on this quarterback.

In this scenario, nothing inherently changed about the quarterback. Instead, it was his surrounding environment that changed. The same thing happens with growth stocks. During low interest/inflation periods, growth stocks thrive. But, not so much during periods of high inflation.

Hopefully, this has given you a clearer picture of growth stocks vs. inflation. But, we still have to answer a big question: how should you react to all of this?

Should You Still Invest in Growth Stocks?

This depends on your time horizon. Despite the recent selloff in growth stocks, it doesn’t mean that you should avoid them altogether. In fact, high inflationary periods could be a great time to establish a large position in quality companies. However, you will likely have to wait longer for this investment to pay off. Growth stocks may still be successful but it will likely take them longer to reach their growth projections.

I hope that you’ve found this article on growth stocks vs. inflation to be valuable! Please remember that I’m not a financial advisor and am just offering my own research and commentary. As usual, please base all investment decisions on your own due diligence.

The post Growth Stocks vs. Inflation: How Inflation Affects Growth appeared first on Investment U.

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Economics

Here’s Why Royal Caribbean, Carnival Stock Are Good Buys

Yes, Carnival reported a bigger-than-expected loss but in this case, unlike taking a cruise, it’s the destination not the journey for the cruise lines.

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Yes, Carnival reported a bigger-than-expected loss but in this case, unlike taking a cruise, it's the destination not the journey for the cruise lines.

For the past two years, since the covid pandemic hit in late-February 2020, the cruise industry has taken one punch after another. And, while the situation has improved from the extended period when cruises were not allowed to sail from United States ports, that does not mean that it's back to 2019 for Royal Caribbean International (RCL) - Get Royal Caribbean Group Report, Carnival Cruise Line (CCL) - Get Carnival Corporation Report, and Norwegian Cruise Line (NCLH) - Get Norwegian Cruise Line Holdings Ltd. Report.

The industry has done a remarkable job bringing operations back to near-normal. All three cruise lines not only have put all their ships back in service, they're also still moving forward with plans for new ships and other investments including improvements to private islands, and developing new ports.

That being said, Carnival just reported its second-quarter earnings and the market did not like the numbers at all. Shares of all three cruise lines were down double digits on Sept. 30, but traders clearly missed that aside from rising costs and a loss (both of which were expected) the cruise line largely delivered good news.

Image source: Shutterstock

Carnival Did Well in Areas it Controls  

Carnival reported a GAAP net loss of $770 million for the quarter. That was driven by higher costs with the company specifically citing advertising expenses and having some of its fleet unavailable to produce revenue.

While the company's year-to-date adjusted cruise costs excluding fuel per ALBD during 2022 has benefited from the sale of smaller-less efficient ships and the delivery of larger-more efficient ships, this benefit is offset by a portion of its fleet being in pause status for part of the year, restart related expenses, an increase in the number of dry dock days, the cost of maintaining enhanced health and safety protocols, inflation and supply chain disruptions. The company anticipates that many of these costs and expenses will end in 2022.

If you're investing in any cruise line you have to do so on a very long-term basis. That makes profitability less of a concern than the company building back its business and Carnival showed some very positive signs in that direction.

  • Revenue increased by nearly 80% in the third quarter of 2022 compared to second quarter 2022, reflecting continued sequential improvement.
  • Onboard and other revenue per PCD for the third quarter of 2022 increased significantly compared to a strong 2019
  • Total customer deposits were $4.8 billion as of August 31, 2022, approaching the $4.9 billion as of August 31, 2019, which was a record third quarter.

  • New bookings during the third quarter of 2022 primarily offset the historical third quarter seasonal decline in customer deposits ($0.3 billion decline in the third quarter of 2022 compared to $1.1 billion decline for the same period in 2019).

Carnival (and likely all the cruise lines) is being hurt by prices generally being depressed and some passengers paying for their trips using future cruise credits from cruises canceled during the pandemic. That's not really what matters though. Carnival has been increasing passenger loads and getting people back on its ships.

"Since announcing the relaxation of our protocols last month, we have seen a meaningful improvement in booking volumes and are now running considerably ahead of strong 2019 levels," Carnival CEO Josh Weinstein said. "We expect to further capitalize on this momentum with renewed efforts to generate demand. We are focused on delivering significant revenue growth over the long-term while taking advantage of near-term tactics to quickly capture price and bookings in the interim."

Basically, cruise prices are cheap right now because it's more important to get customers back on board than it is to maintain pricing integrity. That's a tactic that could hurt long-term pricing, but the cruise industry is less vulnerable than other vacation options because there have always been large pricing variations based on the calendar and the age of the ship being booked.

It's a Long Voyage for Cruise Lines

Carnival was trading at its 52-week low after it reported. That's a pretty major overreaction given that the cruise industry was barely operating in the fall of 2021.

Yes, the industry has a long way to go. All three major cruise lines took on billions of dollars of debt during the pandemic. Refinancing that debt in an environment with higher interest rates is a challenge, but it's one Carnival (and its rivals) have been meeting.

That has come with some shareholder dilution. Carnival sold $1.15 billion in new stock during the quarter, but the company has over $7.4 billion in liquidity. Weinstein is optimistic (he has to be, that's part of his job) about the future.

"During our third quarter, our business continued its positive trajectory, achieving over $300 million of adjusted EBITDA and reaching nearly 90% occupancy on our August sailings. We are continuing to close the gap to 2019 as we progress through the year, building occupancy on higher capacity and lower unit costs," he said.

Usually it's easy to dismiss a CEO making upbeat comments after posting a loss, but in this case, Carnival has basically followed the recovery path it laid out once it returned to sailing. Both Royal Caribbean and Norwegian have followed similar paths and while meaningful shareholder returns may take time, these are strong companies built for the long-term that made a lot of money before the pandemic and should do so again. 

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Spread & Containment

Three reasons a weak pound is bad news for the environment

Financial turmoil will make it harder to invest in climate action on a massive scale.

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Dragon Claws / shutterstock

The day before new UK chancellor Kwasi Kwarteng’s mini-budget plan for economic growth, a pound would buy you about $1.13. After financial markets rejected the plan, the pound suddenly sunk to around $1.07. Though it has since rallied thanks to major intervention from the Bank of England, the currency remains volatile and far below its value earlier this year.

A lot has been written about how this will affect people’s incomes, the housing market or overall political and economic conditions. But we want to look at why the weak pound is bad news for the UK’s natural environment and its ability to hit climate targets.

1. The low-carbon economy just became a lot more expensive

The fall in sterling’s value partly signals a loss in confidence in the value of UK assets following the unfunded tax commitments contained in the mini-budget. The government’s aim to achieve net zero by 2050 requires substantial public and private investment in energy technologies such as solar and wind as well as carbon storage, insulation and electric cars.

But the loss in investor confidence threatens to derail these investments, because firms may be unwilling to commit the substantial budgets required in an uncertain economic environment. The cost of these investments may also rise as a result of the falling pound because many of the materials and inputs needed for these technologies, such as batteries, are imported and a falling pound increases their prices.

Aerial view of wind farm with forest and fields in background
UK wind power relies on lots of imported parts. Richard Whitcombe / shutterstock

2. High interest rates may rule out large investment

To support the pound and to control inflation, interest rates are expected to rise further. The UK is already experiencing record levels of inflation, fuelled by pandemic-related spending and Russia’s war on Ukraine. Rising consumer prices developed into a full-blown cost of living crisis, with fuel and food poverty, financial hardship and the collapse of businesses looming large on this winter’s horizon.

While the anticipated increase in interest rates might ease the cost of living crisis, it also increases the cost of government borrowing at a time when we rapidly need to increase low-carbon investment for net zero by 2050. The government’s official climate change advisory committee estimates that an additional £4 billion to £6 billion of annual public spending will be needed by 2030.

Some of this money should be raised through carbon taxes. But in reality, at least for as long as the cost of living crisis is ongoing, if the government is serious about green investment it will have to borrow.

Rising interest rates will push up the cost of borrowing relentlessly and present a tough political choice that seemingly pits the environment against economic recovery. As any future incoming government will inherit these same rates, a falling pound threatens to make it much harder to take large-scale, rapid environmental action.

3. Imports will become pricier

In addition to increased supply prices for firms and rising borrowing costs, it will lead to a significant rise in import prices for consumers. Given the UK’s reliance on imports, this is likely to affect prices for food, clothing and manufactured goods.

At the consumer level, this will immediately impact marginal spending as necessary expenditures (housing, energy, basic food and so on) lower the budget available for products such as eco-friendly cleaning products, organic foods or ethically made clothes. Buying “greener” products typically cost a family of four around £2,000 a year.

Instead, people may have to rely on cheaper goods that also come with larger greenhouse gas footprints and wider impacts on the environment through pollution and increased waste. See this calculator for direct comparisons.

Of course, some spending changes will be positive for the environment, for example if people use their cars less or take fewer holidays abroad. However, high-income individuals who will benefit the most from the mini-budget tax cuts will be less affected by the falling pound and they tend to fly more, buy more things, and have multiple cars and bigger homes to heat.

This raises profound questions about inequality and injustice in UK society. Alongside increased fuel poverty and foodbank use, we will see an uptick in the purchasing power of the wealthiest.

What’s next

Interest rate rises increase the cost of servicing government debt as well as the cost of new borrowing. One estimate says that the combined cost to government of the new tax cuts and higher cost of borrowing is around £250 billion. This substantial loss in government income reduces the budget available for climate change mitigation and improvements to infrastructure.

The government’s growth plan also seems to be based on an increased use of fossil fuels through technologies such as fracking. Given the scant evidence for absolutely decoupling economic growth from resource use, the opposition’s “green growth” proposal is also unlikely to decarbonise at the rate required to get to net zero by 2050 and avert catastrophic climate change.

Therefore, rather than increasing the energy and materials going into the economy for the sake of GDP growth, we would argue the UK needs an economic reorientation that questions the need of growth for its own sake and orients it instead towards social equality and ecological sustainability.

The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.

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Economics

Covid-19 roundup: Swiss biotech halts in-patient PhII study; Houston-based vaccine and Chinese mRNA shot nab EUAs in Indonesia

Another Covid-19 study is hitting the breaks as a Swiss biotech is pausing its Phase II trial in patients hospitalized with Covid-19.
Kinarus Therapeutics…

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Another Covid-19 study is hitting the breaks as a Swiss biotech is pausing its Phase II trial in patients hospitalized with Covid-19.

Kinarus Therapeutics announced on Friday that the Data and Safety Monitoring Board (DSMB) has reviewed the company’s Phase II study for its candidate KIN001 and has recommended that the study be stopped.

According to Kinarus, the DSMB stated that there was a low probability to show statistically significant results as the number of Covid-19 patients that are in the hospital is lower than at other points in the pandemic.

Thierry Fumeaux

“As many of our peers have learned since the beginning of the pandemic, it has become challenging to show the impact of therapeutic intervention at the current pandemic stage, given the disease characteristics in Covid-19 patients with severe disease. Moreover, there are also now relatively smaller numbers of patients that meet enrollment criteria, since fewer patients require hospitalization, in contrast to the situation earlier in the pandemic,” said Thierry Fumeaux, Kinarus CMO, in a statement.

Fumeaux continued to state that the drug will still be investigated in ambulatory Covid-19 patients who are not hospitalized, with the goal of reducing recovery time and the severity of the virus.

The KIN001 candidate is a combination of the small molecule inhibitor pamapimod and pioglitazone, which is currently used to treat type 2 diabetes.

The news has put a dampener on the company’s stock price $KNRS.SW, which is down 22% since opening on Friday.

Houston-developed vaccine and Chinese mRNA shot win EUAs in Indonesia

While Moderna and Pfizer/BioNTech’s mRNA shots to counter Covid-19 have dominated supplies worldwide, a Chinese-based mRNA developer and IndoVac, a recombinant protein-based vaccine, was created and engineered in Houston, Texas by the Texas Children’s Hospital Center for Vaccine Development  vaccine is finally ready to head to another nation.

Walvax and Suzhou Abogen’s mRNA vaccine, dubbed AWcorna, has been approved for emergency use for adults 18 and over by the Indonesian Food and Drug Authority.

Li Yunchun

“This is the first step, and we are hoping to see more families across the country and the rest of the globe protected, which is a shared goal for us all,” said Walvax Chairman Li Yunchun, in a statement.

According to Walvax, the vaccine is 83% effective against the “wild-type” of SARS-CoV-2 infection with the strength against the Omicron variants standing at around 71%. The shots are also not required to be stored in deep freeze conditions and can be put in storage at 2 to 8 degrees Celsius.

Walvax and Abogen have been making progress on their mRNA vaccine for a while. Last year, Abogen received a massive amount of funding as it was moving the candidate forward.

However, while the candidate is moving forward overseas, it’s still finding itself stuck in regulatory approval in China. According to a report from BNN Bloomberg, China has not approved any mRNA vaccines for domestic usage.

Meanwhile, PT Bio Farma, the holding company for state-owned pharma companies in Indonesia, is prepping to make 20 million doses of the IndoVac COVID-19 vaccine this year and 100 million doses by 2024.

IndoVac’s primary series vaccines include nearly 80% of locally sourced content. Indonesia is seeking Halal Certification for the vaccine since no animal cells or products were used in the production of the vaccine. IndoVac successfully completed an audit from the Indonesian Ulema Council Food and Drug Analysis Agency, and the Halal Certification Agency of the Religious Affairs Ministry is expected to grant their approval soon.

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