After a tough 2022, growth stocks have had the upper hand during the first two months this year: The Morningstar US Growth Index outperformed the Morningstar US Value Index by more than 8 full percentage points through the end of February 2023.
Can the growth stock rally last? Morningstar senior U.S. market strategist Dave Sekera expects volatility ahead. “Looking forward, we suspect that the market will be entering a stage where economic and monetary headwinds will slow additional gains over the first half of the year,” he says. It’s therefore best to adopt a long-term investing mindset when buying growth stocks today.
Our best growth stocks for the long term share a few qualities:
1) They land in the growth portion of the Morningstar Style Box.
2) The stocks are from companies included on Morningstar’s list of the Best Companies to Own for 2023. Companies on this list all have wide Morningstar Economic Moat Ratings that are stable or growing with predictable cash flows, and they are run by management teams that make smart capital-allocation decisions.
4) They look undervalued, which means they’re trading below their fair value estimates.
The Stocks in Detail
Disney is a large-growth company with significant competitive advantages, as its media networks segment and collection of Disney-branded businesses demonstrate strong pricing power, says Morningstar senior analyst Neil Macker. In the most recent quarter, Disney reported decent earnings with back-again CEO Bob Iger reapplying his stamp. The company is cutting costs and restructuring around three units: entertainment, ESPN, and parks/experiences/products. Disney stock is 35% undervalued relative to our $155 fair value estimate.
Tyler Technologies is a midsize growth company that is the clear leader in a slow-moving and underserved niche market of government operational software, says Morningstar senior analyst Dan Romanoff. Management’s guidance for 2023 includes faster software-as-a-service growth accompanied by license revenue contraction, which should pinch revenue and margins in the short term. But we think the pipeline is healthy and state budgets are sound. Tyler Technologies is 30% undervalued relative to our $475 fair value estimate.
Guidewire Software is the only small-growth stock on our list. The company provides software solutions for property and casualty insurers, and we view it as the primary winner as the property-casualty insurance industry continues to modernize, says Romanoff. As such, we think the company’s competitive advantages are growing, as our positive moat trend rating suggests. The firm enjoys high customer switching costs, too. Guidewire Software stock is 23% undervalued relative to our $95 fair value estimate.
Large-cap Intuit is a giant when it comes to U.S. small-business accounting (QuickBooks) and do-it-yourself tax software (TurboTax). The company benefits from significant switching costs in both the small-business/self-employed segment and in its consumer segment, says Morningstar analyst Julie Bhusal Sharma. We also like the company’s internal innovation and synergistic acquisitions, which have earned the team an Exemplary capital allocation rating, she adds. Recent quarterly results and forecast were solid, too. Intuit stock is 19% undervalued relative to our $503 fair value estimate.
Microsoft is the largest stock by market capitalization on our list. The company has successfully transitioned from a traditional perpetual license model to a subscription model. Microsoft is also a leader in the cloud, using its on-premises dominance to allow clients to move to the cloud at their own pace, says Romanoff. In the most recent quarter, Microsoft earnings were solid, despite caution on revenue and the cloud business this year. We assign management an Exemplary capital allocation rating thanks in part to the company’s sound balance sheet and exceptional investments. Microsoft stock is 18% undervalued to our $310 fair value estimate.
As the predominant supplier of photolithography equipment for semiconductor manufacturers, large-cap ASML stands to benefit from the proliferation of extreme ultraviolet lithography and leading-edge chipmakers, says Morningstar strategist Abhinav Davuluri. We therefore think the company’s competitive advantages are growing, as our positive moat trend rating suggests. We think the management team maintains a sound balance sheet and delivers attractive distributions to shareholders, and its investments have been topnotch, too. ASML stock is 16% undervalued relative to our $760 fair value estimate.
Morningstar director Damien Conover calls the pipeline at AstraZeneca “one of the strongest in the drug group,” and we think the company has several products in development with blockbuster potential. The company’s existing product portfolio includes several key cancer drugs and the cardiovascular drug Farxiga. With its patents, economies of scale, and powerful distribution network, the drugmaker has carved out significant competitive advantages, and we think management has done an exemplary job of managing the balance sheet and investing in research and development. AstraZeneca stock is 12% undervalued relative to our $74 fair value estimate.
Autodesk is considered the global industry standard computer-aided design software, says Sharma. Its complex products—which span the architecture, engineering, construction, and product design and manufacturing industries, among others—boast high switching costs. The company’s balance sheet is sound, and we think management has done an exceptional job with its internal investment strategy. Though recent results fell short of target because of persistent macroeconomic headwinds, we view the headwinds as transitory. Autodesk stock is 10% undervalued relative to our $230 fair value estimate.
S&P Global has carved out a wide economic moat from its data-driven benchmarks focused on credit markets, financial indexes, and commodities price reporting. In addition to its solid competitive position and pricing power, the company enjoys strong operating margins, says Morningstar analyst Rajiv Bhatia. Strategically sensible acquisitions and attractive distribution policies earn the firm’s management an Exemplary capital allocation rating. The firm’s global diversification helped offset weakness in its rating business last quarter, adds Bhatia. S&P Global stock is slightly undervalued, trading 6% below our $370 fair value estimate.
The largest payment processor in the world, Visa is a longtime market leader that still enjoys strong growth prospects, thanks to the ongoing shift to electronic payments globally. In fact, Morningstar senior analyst Brett Horn calls Visa’s electronic payment structure “unassailable.” Visa held up relatively well in its first fiscal quarter of 2023, despite concerns about a potential macroeconomic downturn and the impact on consumer spending. The company has been enjoying a boost from the recovery in travel spending, adds Horn. Visa stock is about fairly valued, trading just 2% below our $229 fair value estimate.
What Are the Morningstar Style Box and Fair Value Estimate?
The Morningstar Style Box is a nine-square grid that provides a graphical representation of the investment style of stocks, bonds, or funds. Based on a series of inputs – including a company’s historical and long-term projected growth and its historical and forward-looking price multiples – a stock is classified as either a value stock, a growth stock, or a core stock. A stock is also classified as either small-cap, mid-cap, or large-cap based on its market capitalisation.
The Morningstar Fair Value Estimate, meanwhile, represents what Morningstar analysts think a particular stock is worth. Fair value estimates are rooted in the fundamentals and based on how much cash we think a company can generate in the future, not on fleeting metrics such as recent earnings or current stock price momentum. Learn more about how Morningstar values stocks in Morningstar’s Guide to Stock Investing.
How to Find More Growth Stocks
Of course, there are many other criteria investors can use to find growth stocks to buy for the long term. Here are some tools that investors can use to find more growth-stock ideas to research further:
Investors can review Morningstar’s lists of stocks: undervalued 5-star stocks for example, or those with a wide economic moat.
Those who’d rather invest in growth stocks through a fund can find ideas to research further in our list of top-rated funds.
