Growth stocks are getting drubbed this year, and while much of the attention paid to that punishment focuses on large- and mega-cap names, the fact is that rising interest rates are pinching growth equities of all stripes.
That’s been a drag on exchange traded funds such as the Invesco QQQ Trust (QQQ) and the Invesco NASDAQ 100 ETF (QQQM). To this point in 2022, calling a specific bottom in growth stocks or even estimating when that will happen has been a fool’s errand.
What’s not foolish is to recognize that QQQ and QQQM — two ETFs deserving of the growth classification — are now homes to a variety of stocks that are, in the eyes of some analysts, deeply undervalued relative to historical norms.
“The current level of undervaluation is the greatest discount to our long-term, intrinsic valuations since the emergence of the pandemic. Intramonth March 2020, the price/fair value bottomed out at 0.77 on March 23, 2020,” noted Morningstar analyst Dave Sekera.
Specific to growth fare, the valuation discounts are currently steep relative to the broader market, indicating that QQQ and QQQM may be offering more value than meets the eye.
“Growth stocks are the most undervalued, trading at a price/fair value of 0.75, followed by the value category trading at 0.77. Core stocks are trading closer to fair value at 0.86. Investors appear to be best positioned with a barbell-shaped strategy, overweighting both value and growth categories and underweighting core,” added Sekera.
Among the large- and mega-cap growth stocks currently considered undervalued are an array of QQQ and QQQM member firms, including but not limited to Google parent Alphabet (NASDAQ:GOOG), Comcast (NASDAQ:CMCSA), and Facebook parent Meta Platforms (NASDAQ:META). Those three communication services names combine for 11% of the QQQ and QQQM rosters.
While Alphabet and Meta are dominant companies and among the most widely known components in QQQ and QQQM, other holdings in these ETFs offer attractive valuations and compelling long-term trajectories of their own.
“Meta Platforms and Alphabet both underperformed the market this past quarter and helped push the communications sector even deeper into undervalued territory. Yet, even excluding these two stocks, we see significant amount of value among the traditional media and communications companies. Many of these companies are in the midst of building out their own streaming services, and the market has been especially pessimistic regarding their long-term prospects,” concluded Sekera.
The technology, consumer cyclical, and communication services sectors are among the groups most undervalued today, and they combine for about 82% of QQQ and QQQM.
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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.