Investors looking for the alluring combination of favorable valuations, quality, and growth don’t have to look far. In fact, plenty of familiar mega-cap growth stocks are today sporting enviable quality traits and compelling valuations.
Plenty of those names are also marquee components in a variety of exchange traded funds, including the Invesco QQQ Trust (QQQ) and the Invesco NASDAQ 100 ETF (QQQM). Adding to the allure of QQQ and QQQM is the point that some of the ETFs’ holdings that are currently undervalued also fit the bill as wide moat names.
“Since the bear-market low point on June 16, stocks with economic moats are doing better than those without a moat, on balance. But when it comes to the year 2022 to date, it’s still a mixed picture,” noted Moringstar analyst Lauren Solberg. “Companies with Morningstar Economic Moat Ratings of narrow, those with competitive advantages our analysts expect will help them fend off rivals and earn excess returns on capital for up to 10 years, rose 14.9% since the bear market’s low in mid-June.”
There’s more good news for investors considering QQQ and QQQM. Some wide moat stocks residing in the Invesco ETFs aren’t just modestly undervalued. They’re deeply discounted, which is a rarity for the holdings of these growth-heavy ETFs.
“Overall, Morningstar analyst valuations show that wide-moat stocks are deeply undervalued, while prices for narrow-moat stocks have been blown out of proportion,” added Solberg. “The differences in short-term performance and valuation have more to do with market-cap weights than moat status, says Morningstar’s director of equity research for index strategies Andrew Lane.”
Of note to investors is the notion that it’s not just smaller, inconsequential members of QQQ and QQQM that are attractively valued. It’s also needle-movers, or large holdings, such as Google parent Alphabet (NASDAQ:GOOG), Amazon (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT), and Adobe (NASDAQ:ADBE), among others.
“Among wide-moat companies, leading industries have been internet retail, which has rallied by 34.1% since the bear-market trough, and software infrastructure, up 16.4%. Internet retail includes cyclical companies engaged in the online sale of merchandise, such as Amazon. The software infrastructure industry is composed of companies that develop and provide products and related services for a wide range of business applications and includes Microsoft and Adobe,” concluded Solberg.
Microsoft, Amazon, and Adobe combine for approximately 19% of the rosters of both 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.
