Growth stocks have led the broader market higher this year, with the Russell 1000 Growth index soaring 27%, compared with a 15% gain for the S&P 500.
But that doesn’t mean investors can't take advantage of buying opportunities, according to Morningstar.
“Growth stocks as a category have approached fair value,” says the research firm’s senior U.S. market strategist, Dave Sekera.
“However, some opportunities remain within growth that are undervalued and provide long-term investors with a significant margin of safety.”
So it’s best to adopt a long-term-investing mindset when buying growth stocks today, according to Morningstar.
It has created a list of the 10 best growth stocks to buy for the long term.
The stocks on this roster come from Morningstar’s list of the best companies to own for 2023. These companies have wide-moat ratings at Morningstar and predictable cash flows. A wide-moat rating means Morningstar analysts think the stocks have competitive advantages that will last at least 20 years.
The companies also are run by management teams that make “smart capital-allocation decisions,” Morningstar says. And they are undervalued compared with Morningstar’s fair value estimates.
Morningstar's list of undervalued growth stocks
1. Yum China (YUMC) -), China’s largest restaurant chain, including KFC and Pizza Hut
Morningstar fair value estimate: $84. Wednesday price quote: $53.25.
“We believe Yum China's current share price overlooks the opportunities for unit expansion in China's growing fast-food industry. ... Chains account for 18% of restaurant spending in China, compared with 34% across the globe” wrote Morningstar analyst Ivan Su.
“Further margin expansion will be realized by operating leverage and ongoing digital and automation investments.”
2. Tyler Technologies (TYL) -), a provider of software to municipal governments
Morningstar fair value estimate: $475. Wednesday price quote: $380.70.
“We see federal stimulus funds supporting the healthy environment [for Tyler] and see consistent growth and margin expansion over time,” wrote Morningstar analyst Dan Romanoff.
“Tyler is the clear leader for municipal software. ... The pipeline remains healthy, and state budgets are in good shape. This helps drive all revenue lines to be stronger than we anticipated.”
3. Airbus (EADSY) -), the European commercial and military aircraft maker
Morningstar fair value estimate: $43. Wednesday price quote: $35.20.
4. Experian (EXPGY) -), the credit reporting firm
Morningstar fair value estimate: $42. Wednesday price quote: $34.35.
5. Autodesk (ADSK) -), provider of software for architecture, engineering, and construction companies
Morningstar fair value estimate: $240. Wednesday price quote: $204.65.
Diverse group of growth stocks with potential
6. Waters (WAT) -), provider of liquid chromatography, mass spectrometry, and thermal analysis tools
Morningstar fair value estimate: $323. Wednesday price quote: $269.50.
7. ASML Holding (ASML) -), the market-share leader in photolithography systems used to produce semiconductors
Morningstar fair value estimate: $750. Wednesday price quote: $677.30.
8. Microsoft (MSFT) -), the software titan
Morningstar fair value estimate: $360. Wednesday price quote: $327.70.
9. AstraZeneca (AZN) -), the pharmaceutical stalwart
Morningstar fair value estimate: $74. Wednesday price quote: $68.95.
10. Rockwell Automation (ROK) -), provider of automation equipment, software and services
Morningstar fair value estimate: $310. Wednesday price quote: $297.25.
The author of this story owns shares of Microsoft.
