Investors seeking growth stocks that can outperform amid high global risk and uncertainty should consider buying "low beta" growth plays, including Facebook Inc. (FB), Alphabet Inc. (GOOGL), Boston Scientific Corp. (BSX), Medtronic PLC (MDT), Dollar General Corp. (DG) Intercontinental Exchange Inc. (ICE), NextEra Energy Inc. (NEE), and Diamondback Energy Inc. (FANG), according to a study by UBS strategist Francois Trahan, as reported in Barron's.
Growth stocks have lagged the broader S&P 500 Index (SPX) in September, as momentum trades have begun to falter. However, based on his analysis of the last two decades, Trahan finds that lower beta growth stocks outperform higher beta growth stocks when investors become more risk averse, as they did in 2007, 2011, and 2015. Valuation, meanwhile, does not appear to be relevant. “In most cases, the better performing Growth stocks happened to have higher valuations, which did not seem to be a driver of performance,” Tranhan wrote in a note to clients, as quoted by Barron's.
Significance for Investors
For the month-to-date through Sept. 25, 2019, the S&P 500 Growth Index was up by a scant 0.60%, versus a 3.64% gain for the S&P 500 Value Index, and a 2.00% advance for the S&P 500 Index (SPX) as a whole, per S&P Dow Jones Indices. Some Wall Street strategists theorize that the bottoming out of yields on U.S. Treasury securities is driving the rotation, Bloomberg reports. Rising fears about a recession sent yields down, and investors sought refuge in growth and high dividend stocks. Now yields are up, recessionary fears are waning, and investors are reversing those defensive trades.
Beta is a measure of volatility that compares a stock's historic price swings to those in the market as a whole. A beta of less than 1.0 indicates that the stock tends to go up and down less than the market. For example, a beta of 0.5 means that, on average, the percentage change in that stock's price tends to be half the percentage change in the market as a whole, as measured by an index such as the S&P 500.
A beta in excess of 1.0 indicates that the stock is more volatile than the market. For example, a beta of 2.0 means that the stock tends to exhibit price swings that are double the movement in the market index.
Boston Scientific has buy or strong ratings from 18 of the 24 analysts covering it, or 75%, per Yahoo Finance. Their average price target is $48.23, or XX% above the close on Sept. 26, 2019. The company is a leading manufacturer of medical devices and instruments, particular in the area of cardiovascular health. Management is projecting organic revenue growth of 6% to 9% annually through 2022, and an operating margin at 27% by 2020, on the path to a long-term goal of 30%, per Valuentum Securities writing in Seeking Alpha.
Medtronic has buy or strong buy ratings from 11 of 23 analysts, or 52%, per Yahoo Finance. Their average price target is $117.65, or XX above the Sept. 26 close. Also a leading maker of medical devices, especially heart devices, Medtronic is a top player in other areas as well. The company has a high gross profit margin of nearly 70%, strong cash flow, and is expanding rapidly in emerging markets, where revenues are growing at about 12% per annum and represent about 16% of total sales, according to a column in Seeking Alpha.
Stocks with high returns on capital are among the "quality" equities that Goldman Sachs notes are trading at reasonable valuations. In particular, they recommend that investors focus on stocks with high expected rates of increase in return on equity (ROE), per their latest US Weekly Kickstart report.