Through Monday trading,
Nvidia
stock has returned an incredible 244% over the past 12 months. After that run, the stock can’t possibly be cheap, can it? It Is.
And there are more stocks like it that should be attractive to growth investors looking for new ideas.
Investors typically fall into one of two groups: Value and growth. Value investors try to make money by buying quality stocks at a discount. Growth investors believe that, well, growth is key to making money, even more than buying the cheapest stocks.
For our screen, Barron’s looked at stocks that were growing revenue at least as fast than
Amazon,
which is expected to grow sales in 2024 by 12%. That’s a pretty fast clip for a company that just reported about $575 billion in 2023 sales.
Nvidia is one of the stocks growing faster than that. It’s growing much faster. Sales are expected to be up some 60% in calendar year 2024, according to FactSet. Shares, however, trade at about 35 times estimated 2024 earnings. The
S&P 500
trades for closer to 20 times.
How can that be considered cheap? Growth. Wall Street expects earnings per share to grow at an average annual rate of roughly 150% between 2023 and 2025. That gives Nvidia a price-to-earnings-to-growth, or PEG, ratio of just 0.23. (You take its P/E ratio of 35 and divide by 150 to get that number.) PEG is a tool used by growth investors that helps normalize for high growth.
A PEG of 0.23 is incredibly low. Stocks in the
Russell 1000 index
that are profitable generally have a PEG ratio of a little below two times. (They trade for about 20 times earnings and are expected to grow earnings at about 12% a year.)
The lowest 12 PEG ratios Barron’s found for Russell 1000 stocks growing sales at least 12%, in no particular order, were: Nvidia, marketing platform
AppLovin,
gas infrastructure provider
New Fortress Energy,
solar equipment maker
First Solar,
pharmaceutical makers
Neurocrine Biosciences
and
BioMarin Pharmaceutical,
auto insurer
Progressive,
Lululemon,
healthcare services company
Medpace,
footwear company
Deckers Outdoor,
cybersecurity software provider
CrowdStrike.
Amazon
made the cut too.
The dozen growth stocks trade for an average of 31 times estimated 2024 earnings. Pricey, but earnings growth is expected to average almost 50% for the coming two years, giving the group a PEG ratio of 0.6 times.
Some other popular growth stocks didn’t quite pass muster.
Microsoft
is expected to grow sales by about 15% in 2024, but its PEG ratio is about 1.9 times.
Tesla
is expected to grow sales at north of 20%, but amid price cutting and more competition, Wall Street projects earnings growth of less than 20% a year for the coming two years. With a PE ratio of about 63 times estimated 2024 earnings, Tesla has a PEG ratio of almost 4.
Of course, there is nothing magical about PEG ratios. They are a tool. And as always, a screen is only a starting point for investing. After any screen, investors have to do the hard work of researching companies to see if all the projected growth will come to fruition.
Corrections & Amplifications: The 12 stocks screened by Barron’s have an average price-to-earnings growth, or PEG, ratio of 0.6 times. An earlier version of this article incorrectly said that the average was 1.6 times.
Write to Al Root at [email protected]
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