On Monday, the Russell 1000 Growth Index, which includes high-growth companies such as Microsoft (NASDAQ:MSFT) and Nvidia (NASDAQ:NASDAQ:NVDA), continued its recent trend of decline. The index has seen a 6% decrease from its peak in late July, despite maintaining a year-to-date gain of 24%, primarily driven by investor interest in artificial intelligence and increased earnings estimates.
The dip in growth stocks has been partly attributed to rising bond yields. The 10-year Treasury yield has been on an upward trajectory, reducing the value of future profits. This trend is particularly significant for growth companies whose valuation often hinges on profits expected to be realized in future years.
However, if bond yields cease to rise, some growth stocks could appear increasingly attractive. A halt in yield increases might stabilize valuations and potentially lead to stock price increases over time.
Citi's strategists have identified several such growth stocks that have become more appealing during the recent downturn. They selected stocks that have fallen more than 10% from their annual highs and whose free-cash-flow estimates have been raised by analysts since the end of March. Furthermore, these companies need to have five-year free-cash-flow estimates exceeding their current implied market capitalizations. This could suggest that these companies' cash flow potentials are being undervalued by investors.
Among the identified stocks are Paycom Software (NYSE:NYSE:PAYC), MongoDB (NASDAQ:NASDAQ:MDB), Rockwell Automation (NYSE:NYSE:ROK), Las Vegas Sands (NYSE:NYSE:LVS), Bruker (NASDAQ:NASDAQ:BRKR), DraftKings (NASDAQ:NASDAQ:DKNG), and Lockheed Martin (NYSE:NYSE:LMT). Lam Research (NASDAQ:NASDAQ:LRCX), a provider of equipment for chip manufacturers, also emerged as a promising option. Its stock has dropped 14% from its annual high, but its free-cash-flow estimates have surged almost 24% since March. This is largely due to an anticipated increase in demand for chip manufacturing equipment as artificial intelligence needs grow within the cloud business sector.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.