At the start of 2023, there were some truly exceptional opportunities in growth stocks. The prospect of rising interest rates in both the UK and the US drove prices to usually low levels.
But with interest rates still going up, is there still a once-in-a-decade opportunity in growth stocks? If not, what are the best stocks to buy at today’s prices?
Mixed fortunes
In a number of cases, growth stocks have been unimpeded by rising interest rates in 2023. Alphabet is a good example.
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Back in January, the stock was trading at a price-to-earnings (P/E) ratio of around 17. Fast forward to today and the stock is up around 40%, but now trades at a P/E ratio of around 28.
The same is true of a number of other growth stocks, especially Google’s big tech colleagues, such as Amazon (+45%), Apple (+45%), and Microsoft (+40%). It’s hard to see these as bargains at the moment.
In the UK, growth stocks haven’t seen quite the same rally in 2023. But with Halma (41), Diploma (32), and Experian (43) all trading at high P/E multiples, it’s difficult to argue that these are unusually cheap.
There are some exceptions – Zoom Video Communications, Pinterest, and Illumina are all close to where they were at the start of the year. But in general, growth stocks aren’t obvious bargains right now.
As a result, I think the window for buying growth stocks might have closed for now. It will come again – of that I have no doubt – but for now, it’s time to look elsewhere for bargains in the stock market.
Dividend shares
So if growth stocks aren’t obvious bargains at the moment, where should investors like me look for stocks to buy? The answer, in my view, is dividend shares.
A couple of sectors stand out to me – commodities and real estate. There seems to me to be quite a bit of pessimism reflected in share prices right now and this is creating some good investment opportunities.
BP shares look attractive to me despite oil prices being lower than they were a year ago. There’s an ongoing risk from potential windfall taxes, but I think the stock’s low P/E ratio already accounts for this.
Equally, Warehouse REIT shares look like a rare opportunity to me. Rising interest rates are a risk, but I see today’s prices as an unusual opportunity to invest in real estate.
Both stocks have been left behind by the rally in growth stocks this year. Shares in BP are pretty much level with where they started 2023 and Warehouse REIT’s share price has fallen by 3% or so.
As a result, though, each of these stocks has an eye-catching dividend yield at today’s prices. With BP shares, it’s 4.5%, and Warehouse REIT shares have a 6% dividend.
Stocks to buy
In my view, it’s clear that a number of growth stocks have now reached levels where they aren’t once-in-a-decade opportunities. This isn’t true across the board, but it seems to generally be the case.
Right now, I think dividend stocks look attractive by comparison. With share prices falling, it looks to me like this could be a good time for investors looking for passive income.
