Growth stocks have taken a hit recently, but there are a few attractive bets in the market that could rebound. The Russell 1000 Growth Index, which includes fast-growing companies like Microsoft and Nvidia, is down about 6% from its peak earlier this year. However, analysts believe this dip is just a breather, as the index still boasts a year-to-date gain of 24% thanks to investor enthusiasm for artificial intelligence.
One factor contributing to the drop in growth stocks is higher bond yields. As bond yields rise, future profits become less valuable, impacting the valuation of growth companies. These stocks are typically valued based on the assumption that most of their profits will come in the future. However, if bond yields stabilize, it could help stabilize valuations, leading to an upward trajectory for these stocks.
Citi strategists have identified a number of growth stocks that have become more attractive during this pullback. They screened for stocks that have dropped more than 10% from their highs for the year and have seen analysts raise their free-cash-flow estimates since the end of March. Additionally, these companies must have free-cash-flow estimates for five years from now that are higher than their current market capitalizations suggest. This indicates that investors may be underappreciating the potential for these companies to generate cash flow.
Some of the top picks from this screen include Paycom Software, MongoDB, Rockwell Automation, Las Vegas Sands, Bruker, DraftKings, and Lockheed Martin. Another stock that stands out is Lam Research, which makes equipment for chip makers. Despite being down 14% from its high for the year, Lam Research has seen its free-cash-flow estimates rise by almost 24% since the end of March. Wall Street is optimistic about the company’s future prospects as chip makers will need to purchase more equipment to meet growing demand for artificial intelligence in the cloud business.
Pinterest is also worth considering, as its stock is down about 12% from its high for the year. However, free-cash-flow estimates have increased by around 0.4% since the end of March. Pinterest expects to see sales growth of close to 20% per year as it increases monetization of users abroad, which could lead to high bottom-line growth.
Intuitive Surgical, a company focused on robotic-assisted surgical systems, has seen its stock drop 18% from its high for the year. However, this decline does not accurately reflect the company’s overall revenue. Free-cash-flow estimates have even edged 0.5% higher since the end of March, indicating optimism about future performance.
Chipotle Mexican Grill is another growth stock that has experienced a pullback, with its stock down about 13% from its peak this year. Despite this decline, free-cash-flow estimates have risen by 8% since the end of March. The quick-service-restaurant chain has been exceeding profit forecasts and expects to continue growing sales annually.
In conclusion, while growth stocks may have taken a hit recently, there are still attractive opportunities in the market. Investors should consider stocks that have dropped from their highs for the year and have seen analysts raise their free-cash-flow estimates. By doing so, they can take advantage of undervalued stocks with strong growth potential.
