The Nasdaq-100 Index (NDX) is up 13.10% year-to-date, underscoring the point that growth stocks are starting 2023 in far better form than was displayed last year.
Fortunately for investors, while growth stocks are rebounding, the group is still offering some attractive values, several of which are available in exchange traded funds such as the Invesco QQQ Trust (QQQ) and the Invesco NASDAQ 100 ETF (QQQM) — both of which track the Nasdaq-100.
Importantly, several of the QQQ and QQQM member firms that currently look appealing on valuation are also classified as wide moat companies, meaning it’s difficult for competitors to make inroads against durable business models.
“Economic moats reflect the degree to which a company has durable competitive advantages. A company with an economic moat can fend off competition and earn high returns on capital for many years to come. Morningstar analysts assess companies as having a wide moat, narrow moat, or no moat,” noted Morningstar analyst Margaret Guidici.
It won’t surprise experienced investors to know that Microsoft (NASDAQ: MSFT) qualifies as a wide moat, but it might be a pleasant surprise to some that the stock remains undervalued. That’s pertinent to market participants considering QQQ and QQQM, because Microsoft is the second-largest holding in those ETFs at a weight of 12.10%. Apple (NASDAQ: AAPL) is the largest component at 12.23%.
“Microsoft has thus far been successful in growing revenue in a constantly evolving technology landscape and is enjoying success in both moving existing workloads to the cloud for current customers and attracting new clients directly to Azure. However, it must continue to drive revenue growth of cloud-based products faster than revenue declines in on-premises products,” wrote Morningstar analyst Dan Romanoff.
Other QQQ and QQQM member firms on Morningstar’s list of undervalued wide moat tech names include Lam Research (NASDAQ: LRCX) and Workday (NASDAQ: WDAY).
“We consider Workday to be a best-of-breed cloud-only platform for human capital management, or HCM, software. By debuting in 2005 as a first mover in the cloud HCM space at an ideal time—when enterprises were looking to make the move from on-premises to cloud software solutions—Workday has benefited from its timeliness as well as its high-quality product and reputation for smooth implementations,” added Morningstar analyst Julie Bhusal Sharma.
Lam Research and Workday combined for nearly 1% of the QQQ and QQQM portfolios as of Feb. 17.
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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.
