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Stocks with Reasonably Valued Growth Becoming Scarce, Says Goldman Sachs
Growth-Driven Rally Increases Valuation Premium
Goldman Sachs has noted that finding stocks with reasonably valued growth is becoming increasingly difficult due to the overlap between high-growth and expensive stocks. The bank stated that the growth-driven rally this year has brought the valuation premium of high-growth stocks close to 10-year highs. In response to this, Goldman conducted two screens to identify stocks that still offer growth at a reasonable price.
Screen One: Growth at a Reasonable Price
The first screen focused on stocks with double-digit sales growth (2022-2025 compound annual growth rate) of at least 10% and a low price-earnings-growth ratio below 1.0. Goldman believes that the recent outperformance of growth stocks has created scarcity in high-growth stocks that are still reasonably valued. Here are four of the 18 buy-rated stocks that came up in the screen:
- Nvidia: Goldman analysts expect strong growth from Nvidia due to its generative artificial intelligence and a resumption in gaming revenue growth.
- SolarEdge Technologies: Investors can also anticipate significant growth from SolarEdge, particularly in Europe, which is set to be one of the fastest-growing regions for solar installations.
- BioMarin Pharmaceutical: This US biotech firm is considered an attractive profitable-growth play driven by its key drugs, Roctavian and Voxzogo.
- Shift4 Payments: Goldman analysts believe that Shift4 Payments is well-positioned to compete with new entrants in the small and medium businesses payments landscape, thanks to its modern restaurant POS platform and new verticals.
Screen Two: Underappreciated Margin Expansion
The second screen focused on stocks with underappreciated margin expansion. Goldman screened for buy-rated stocks expected to deliver at least 5% sales growth in both 2023 and 2024, positive incremental operating margins in each year, and operating margin expansion of at least 150 basis points between 2022 and 2024. The bank emphasized that margins will remain a focus through 2023 and into 2024. Here are three of the 18 stocks that emerged from this screen:
- Amazon: Goldman highlighted Amazon's strong revenue and margin performance, particularly in its cloud computing unit AWS, which continues to benefit from a structural growth opportunity.
- Johnson Controls International: The US building products company's service business has the potential to create more growth and margin expansion opportunities in the long term. Cost savings initiatives and favorable end-market exposure should drive both growth and margin expansion.
- Constellation Brands: Goldman sees Constellation Brands as one of the best growth stories in the consumer staples sector, considering the increasing scarcity of growth.
Goldman Sachs believes that investors should prioritize stocks that offer growth at a reasonable price and have the potential for margin expansion, given the current market conditions.
Conclusion: The Challenge for New Businesses in a Scarcity of Reasonably Valued Growth Stocks
Goldman Sachs' assessment of the current stock market landscape highlights the growing difficulty of finding reasonably valued growth stocks. This presents a potential challenge for new businesses looking to enter the market and attract investors. With the overlap between high-growth and expensive stocks, the valuation premium of high-growth stocks has reached 10-year highs, making it harder to identify undervalued opportunities.
For new businesses seeking investment, this scarcity may mean increased competition for funding. Investors are likely to be more cautious in their selections, seeking companies that offer both growth potential and reasonable valuations. Without a compelling growth story and a solid valuation proposition, new businesses may struggle to attract the necessary capital to fuel their growth ambitions.
However, there are still opportunities for emerging companies to stand out. By focusing on generating double-digit sales growth and maintaining a low price-earnings-growth ratio, businesses can position themselves as attractive investment options amidst the scarcity. Additionally, emphasizing underappreciated margin expansion can further bolster their appeal, as it demonstrates the potential for sustainable profitability.
Overall, new businesses will need to navigate the current market conditions by showcasing their growth potential while simultaneously addressing valuation concerns to entice investors. By adopting prudent financial strategies, demonstrating unique value propositions, and capturing market opportunities, these businesses can increase their chances of securing the necessary resources for growth and long-term success in an environment where reasonably valued growth stocks are becoming scarce.
Article First Published at: https://www.cnbc.com/2023/07/27/goldman-sachs-names-stocks-with-growth-at-a-reasonable-price.html