High-growth technology and consumer cyclical stocks are again leading the market, though some high-quality growth names are still trading at steep discounts, Lauren Solberg, a Morningstar data journalist, wrote in a blog post this week.
Growth stocks are up 18% since the June 16 bear market low point as measured by the Morningstar U.S. Growth Index, six percentage points ahead of the broader U.S. market. But growth stocks are still down 22.3% for the year through Aug. 10.
Solberg said that puts the growth index on track for its worst year since 2008, leaving many growth companies trading below their fair value estimates from Morningstar’s stock analysts.
Growth stocks generally have higher readings on earnings and sales ratios than value stocks, and lower dividend yields as well. Their valuations are largely based on expectations of their future earnings, so they are more affected by moves in interest rates than other areas of the market.
That is in part why growth stocks performed so poorly at the start of the year, dragging down some big names.
To compile a list of the highest-quality undervalued growth stocks, analysts screened the Morningstar U.S. Wide Moat Focus Index, a group of companies with durable competitive advantages that are also trading at the lowest prices relative to their analyst-assessed fair value estimates.
Besides searching for undervalued names, the screen also looked for stocks that have the highest Morningstar growth-value scores, in other words, the “growthiest” undervalued stocks in the index, according to Solberg.
Growth scores are based on the companies’ long-term projected earnings growth, as well as on the growth of their book values, sales, cash flow and historical earnings.
Growth companies score lower than value companies on price/book, price/sales and price/cash flow ratios, and tend to have lower dividend yields.
See the gallery for seven undervalued, wide-moat growth stocks, ranked by their growth-value scores.