Investing in the stock market can be daunting, especially when aiming for long-term growth. With market fluctuations and evolving economic landscapes, choosing the right stock requires careful consideration. This article highlights 10 growth stocks identified by Morningstar as potential candidates for long-term investment. These companies exhibit strong fundamentals, wide economic moats, and are currently trading below or near their fair value estimates.
Growth stocks outperformed value stocks significantly in 2023 and have maintained momentum in 2024. However, this surge has pushed valuations higher. According to Morningstar’s senior U.S. market strategist, Dave Sekera, growth stocks are currently overvalued compared to their intrinsic value. This makes finding undervalued opportunities crucial. Focusing on high-quality companies with sustainable competitive advantages is key in this environment.
The following 10 stocks meet Morningstar’s criteria for long-term growth potential: they are categorized as growth stocks within the Morningstar Style Box, featured on Morningstar’s “Best Companies to Own” list for 2024, possess wide economic moats, predictable cash flows, and are managed by teams with strong capital allocation track records. Finally, and importantly, they are trading at or near their fair value.
Top 10 Undervalued Growth Stocks for Long-Term Investment
The following list represents the 10 most undervalued growth stocks from Morningstar’s Best Companies to Own list as of November 5, 2024:
- Rentokil Initial
- Airbus
- AstraZeneca
- Dassault Systèmes
- GE Aerospace
- Taiwan Semiconductor Manufacturing
- Coloplast
- CoStar Group
- Tyler Technologies
- Amazon
Let’s delve into each company’s profile:
Rentokil Initial (RTO)
Rentokil, a leader in pest control and hygiene services, boasts a market leadership strategy fueled by strategic acquisitions. Its recent acquisition of Terminix solidified its position in the U.S. market. The company’s robust M&A strategy has created a significant cost advantage. Rentokil is currently trading at a substantial discount to its fair value.
Airbus (EADSY)
Airbus, a dominant player in the commercial aircraft manufacturing duopoly with Boeing, benefits from the increasing demand for air travel. Its strong position in the narrow-body aircraft market and focus on fleet growth contribute to its long-term potential. Airbus is currently trading below its fair value estimate.
AstraZeneca (AZN)
AstraZeneca stands out with a robust drug pipeline and several potential blockbuster drugs in development. The company anticipates improved operating margins with the launch of its next-generation drugs. AstraZeneca is currently trading below its fair value estimate.
Dassault Systèmes (DASTY)
Dassault Systèmes dominates the computer-aided design (CAD) software market, particularly in the automotive, aerospace, and manufacturing sectors. Its entrenched position with engineering teams, driven by high switching costs and network effects, ensures its long-term viability. Dassault Systèmes is currently trading below its fair value estimate.
GE Aerospace (GE)
GE Aerospace, a leading aircraft engine manufacturer, powers a significant portion of commercial airline flights. With a projected doubling of the global aircraft fleet by 2042, GE Aerospace is poised for substantial growth. The company is currently trading below its fair value estimate.
Taiwan Semiconductor Manufacturing (TSM)
As the world’s largest dedicated contract chip manufacturer, Taiwan Semiconductor Manufacturing benefits from the growing demand for artificial intelligence, Internet of Things (IoT), and high-performance computing. Its disciplined capital spending approach mitigates oversupply risks. The company is currently trading below its fair value estimate.
Coloplast (CLPBY)
Coloplast, a global leader in ostomy and continence care, has a strong track record of innovation and a dominant market position in Europe. The company’s focus on cost efficiency and profitable growth further enhances its long-term prospects. Coloplast is currently trading below its fair value estimate.
CoStar Group (CSGP)
CoStar Group provides comprehensive commercial real estate data and marketplace listing platforms. Its unique position in the industry and impressive growth trajectory make it a compelling long-term investment. CoStar is trading near its fair value estimate.
Tyler Technologies (TYL)
Tyler Technologies leads the niche market of government operational software. With a projected decade-long growth runway driven by the increasing demand for SaaS and modernization of legacy systems, Tyler Technologies presents a promising investment opportunity. The stock is trading near its fair value estimate.
Amazon.com (AMZN)
Amazon, a dominant force in e-commerce and cloud services through Amazon Web Services (AWS), continues to demonstrate strong revenue and free cash flow growth. Its expanding advertising business further contributes to its long-term potential. Amazon is currently trading around its fair value estimate.
Understanding the Morningstar Style Box and Fair Value Estimate
The Morningstar Style Box categorizes stocks based on their investment style (value, growth, or core) and market capitalization (small, mid, or large). This framework helps investors understand a stock’s characteristics.
The fair value estimate represents Morningstar analysts’ assessment of a stock’s intrinsic worth based on its future cash flow potential, rather than short-term metrics.
Conclusion
Identifying promising long-term investments requires careful analysis of a company’s fundamentals, competitive advantages, and valuation. The 10 stocks highlighted in this article represent potential candidates for long-term growth based on Morningstar’s research. However, investors should conduct their own due diligence and consider their individual investment goals and risk tolerance before making any investment decisions. Remember that past performance is not indicative of future results and even companies with strong fundamentals can experience periods of volatility.
