It’s not yet time to confuse growth and value stocks, but after scuffling in recent months, some growth stocks are trading at more attractive multiples. That includes some venerable names with the quality designation.
That scenario could open the door to opportunities with various exchange traded funds, including the American Century STOXX U.S. Quality Growth ETF (NYSEArca: QGRO). The $225.34 million QGRO is a relevant consideration for investors looking to tap into a broad basket of discounted growth equities that are rarely available on the cheap.
“The result is that U.S. stocks have gone from broadly overpriced to fairly valued, based on valuation estimates for stocks covered by Morningstar’s equity analysts,” says Morningstar analyst Dave Sekera. “The most notable change has been in growth stocks. Shares of the fastest-growing companies had also tended to be the most overvalued. But now that category has become undervalued, and is even more attractive than value stocks.”
Internet search giant Alphabet (NASDAQ:GOOG), which is one of QGRO’s largest components, is among the growth names that currently rank as undervalued. Same goes for Meta Platforms (NASDAQ:FB), formerly Facebook, and currently another QGRO member firm.
“Meta Platforms (FB) stock was pummeled after it reported fourth quarter earnings. The stock is now down 37% year-to-date and is trading at about half of our fair value estimate,” adds Sekera. “In our view, we still consider Facebook and its other platforms to be some of the highest quality platforms for digital advertising, which still in the early stages of secular growth trends.”
With Alphabet saddled with a year-to-date loss, Sekera sees the stock as being in a similar boat as rival Meta. For long-term QGRO investors, the comparison could ultimately be a positive.
“We think the market is underestimating the value of advertising on its platforms as secular growth trends in digital advertising continues,” according to Sekera. “We also think the market is underestimating advertising revenue potential of YouTube and forecast that Google will continue to gain traction in the cloud market.”
Another QGRO holding that is currently undervalued is DocuSign (NASDAQ:DOCU), a cloud computing company that has been mentioned as a potential takeover target. Amazon (NASDAQ:AMZN), also a QGRO holding, is also somewhat undervalued today.
“Compared to the extremely rapid rise in comparable sales in 2020, the growth rate has slowed in 2021. However, we think the market is overly concerned about this near-term slowdown in sales growth. In our valuation, we think the market is underestimating the value of Amazon’s advertising business as well as its Amazon Web Services,” concludes Sekera.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
