Growth stocks have become quite expensive, but some of them are still trading at reasonable prices. Looking for these stocks in a pricey stock market seems to be a smart strategy.
Everyone seems to be in love with "growth" investing these days, a style that focuses on companies with the potential to grow earnings faster than their peers. No index is more growth-oriented than the tech-heavy Nasdaq 100, which is up 13% this year. The Nasdaq 100 has made those gains in part because of first-quarter earnings from tech companies that beat analysts' expectations and rising profit forecasts.
Unfortunately, these stocks are also expensive. The Nasdaq 100's multiple on expected earnings for the next 12 months has remained at just over 26 this year. That's at the high end of where it's been since the Fed began raising rates in early 2022, and well above the S&P 500's multiple of 20.
While growth stocks typically trade at a premium, the entire market is expensive, making all stocks risky. Therefore, Jefferies strategists screen for "fairly priced growth" stocks. With these stocks, investors can enjoy strong profit growth while avoiding high valuations, thus taking on less downside risk than the most expensive stocks.
The strategists look for companies with a market value of at least $2 billion and expected earnings growth of more than an average of 10% per year over the next two years. These companies also have seen earnings estimates revised upward in the past three months and have a PEG ratio (price-to-earnings ratio divided by expected earnings growth) of 1.5 or less, which is about twice that of the S&P 500. This means GARP investors pay less for each percentage point of earnings growth.
The culled examples include the usual suspects, such as Nvidia (NVDA.O), Alphabet (GOOGL.O), Meta Platforms (META.O) and Netflix (NFLX.O). Non-tech names include Progressive and Texas Roadhouse (TXRH.O). The list also includes chipmaker Broadcom (AVGO.O), which reports earnings on Wednesday. Analysts expect its earnings per share to rise 17% annually between this year and 2025, and have raised their estimates for this year by 1% in the past three months. Earnings are likely to grow more slowly than sales as Broadcom invests more in employees and research and margins fall.
Still, growth is expected to be strong, with analysts forecasting annual sales to rise 24% annually to $58 billion by 2025. The infrastructure software business, which includes its recent $69 billion acquisition of VMware, is expected to double over the next two years as it enables Broadcom to provide solutions for data centers, which are seeing increasing demand due to artificial intelligence. Sales of AI-related chips and hardware should also grow. The stock trades at just under 27 times next 12-month earnings, or about 1.5 times expected earnings growth.
Pinterest (PINS.N), a website platform that helps shoppers find clothing, decor and home goods, also made the list. Analysts expect its earnings to grow 28% annually this year and next, and raised their profit forecast for this year by 6%. They expect sales to rise 19% annually to $4.3 billion by 2026. The platform has about 500 million users worldwide, and while the number of users will grow in the mid-single digits, Pinterest is driving growth by getting users to spend more, and average revenue per user will increase significantly.
As people find reasons to trade, advertisers will pay more to run ads on the site, especially since the company's revenue per user is still just a fraction of Meta's. Earnings are expected to grow about 25% annually through 2025. The stock trades at about 28 times earnings and a PEG ratio of about 1. That looks pretty reasonable.
The article is forwarded from: Jinshi Data