Growth stocks have been on a tear so far this year, with the Russell 1000 Growth Index up 12%, amid speculation the Federal Reserve will stop raising interest rates soon.
But even with that climb, growth stocks covered by Morningstar are trading 10% below fair value estimates. While that pales next to the 17% discount for value stocks, there still are some good bargains in the growth arena, says Dave Sekera, senior U.S. market strategist at Morningstar.
Here are four that he cited.
Uber Technologies (UBER), the ride-hailing company. Morningstar assigns it a narrow moat (durable competitive advantage) and puts fair value for the stock at $68. It recently traded at $31.10.
“Uber is still a play on consumer behavior normalization [post-pandemic] and the transition in consumer spending back into services and away from goods,” Sekera said.
“As we see people going back out more, we expect to see an increase both in the number of users as well as the number of rides per user.”
Zscaler (ZS), a cybersecurity software company. Morningstar gives the company a narrow moat and puts fair value for the stock at $170. It recently traded at $101.70.
“There is a positive long-term secular growth trend in the cybersecurity industry,” Sekera said.
“And cybersecurity in and of itself has very attractive dynamics. For instance, cybersecurity is a small percentage of information technology budgets overall, but a company has huge costs if it does suffer a hack or a ransomware attack.”
Tyler Technologies (TYL), a software provider to local governments. Morningstar assigns the company a wide moat and puts fair value for the stock at $475. It recently traded at $348.60.
“This is a name that not many investors may have heard of,” Sekera said. “While it’s a growth [company], it has some defensive attributes, as even in a recession, government entities will rely on those software products and are unlikely to pull back spending.”
Discover Financial (DFS), the credit card company.
Morningstar gives the company a narrow economic moat and puts fair value for the stock at $146. It recently traded at $97.
“Discover stock did pull back in March along with the overall financial sector, following the [failure] of Silicon Valley and Signature Banks. And Discover does use deposits,” Sekera said.
“But they have a lot of other financing options…. This is one good example of how investors can take advantage of dislocations in the financial sector following those bank failures.”
