MW Trump's return should favor growth stocks. Here are 10 with the most upside.
By Philip van Doorn
Quantitative strategists at Jefferies expect Donald Trump's return as president to enable a continued run for growth stocks; they suggest avoiding value as an investment style.
There are many ways to separate stocks into groups, including sector, market value and style: growth or value. In a report on Friday, strategists at Jefferies made the case that growth would work out better for investors than value during the early part of Trump's second term as president.
Growth stocks are those of companies that have achieved shown significant increases for revenue and earnings. They tend to have price momentum on their side because of their expansion and tend to trade at relative high valuations to earnings or book value. Value stocks are generally those of mature companies that have slower growth rates. Many are in cyclical industries. They trade at lower valuations to earnings or book value than growth stocks do. Some value investors are focused on dividend payouts.
Below is a screen of the S&P 500 Pure Growth Index, to show which stocks are favored by analysts with the highest implied upside over the next year, based on consensus price targets.
To support the case for growth to win out during the early phases of Trump's second term, Desh Peramunetilleke, the global head of quantitative strategy at Jefferies, made these points:
-- He expects a repeat of Trump's first term, which he called "a tale of two halves, with Growth doing well in the early stages, while the rest was dominated by Quality and Low-risk."
-- With U.S. economic growth "normalizing," he expects growth stocks to "outshine cyclicals." To this he added: "Lower global trade growth and a cap on oil prices is likely to be a drag on commodities, cyclicals and Value."
-- "Growth stocks are trading at [roughly a] 20% discount to the 5-year peak relative PE," he wrote.
-- Recent revisions of consensus sales or earnings estimates for companies in the growth camp have been better than those in the value group.
Growth and value indexes
To screen growth stocks in the S&P 500 SPX, we could begin with the S&P 500 Growth Index. S&P Dow Jones Indices maintains all of the indexes referred to in this article.
S&P maintains several style indexes taking different approaches to grouping stocks by the growth or value styles. You can review the firm's methodology for its indexes here.
Within the S&P 500, each company is assigned a growth score and a value score one a year.
The growth score incorporates:
-- Three-year change in earnings per share EPS), divided by current price.
-- Three-year sales-per-share growth rate.
-- Momentum, as represented by the 12-month price change.
The value score encompasses ratios of book value, EPS and sales to price.
According to S&P's methodology, this results in about 34% of the stocks being in a blended basket, with "neither pure growth nor pure value characteristics." This and the weighting methodologies result in 233 companies being in the S&P 500 Growth Index currently, with 437 in the value index. There are dozens of stocks that are included in both indexes.
Screening the S&P 500 Pure Growth Index
S&P Dow Jones Indices also maintains "pure" style indexes that have no overlap between them, and they are weighted by their style scores, rather than by market capitalization.
There are 66 stocks in the S&P 500 Pure Growth Index. One way to invest in them as a group is to hold shares of the Invesco S&P 500 Pure Growth ETF RPG.
To get back to Peramunetilleke's point that growth stocks are trading well below their peak valuation relative to value stocks, this chart shows how the price of the S&P 500 Pure Growth Index relative to that of the S&P 500 Pure Value Index has moved over the past five years:
Among the 66 stocks in the S&P 500 Pure Growth Index, here are the 10 with majority buy or equivalent ratings that have the highest 12-month upside among analysts working for brokerage firms polled by FactSet:
Company Ticker Closing price Consensus price target Implied 12-month upside potential Monolithic Power Systems Inc. MPWR $601 $862 44% Eli Lilly and Co. LLY $755 $1,010 34% Advanced Micro Devices Inc. AMD $141 $186 32% Lam Research Corp. LRCX $74 $95 29% KLA Corp. KLAC $645 $820 27% Applied Materials Inc. AMAT $175 $220 26% Alphabet Inc. Class A GOOGL $168 $210 25% Nvidia Corp. NVDA $136 $169 24% Uber Technologies Inc. UBER $73 $91 24% Alphabet Inc. Class C GOOG $169 $210 24% Wynn Resorts Ltd. WYNN $93 $115 23%
There are actually 11 stocks on the list for 10 companies, with two Alphabet share classes included in the index.
Click the tickers for more about each company.
Read: Tomi Kilgore's guide to the wealth of information available for free on the MarketWatch quote page.
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-Philip van Doorn
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November 30, 2024 05:33 ET (10:33 GMT)
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