adminThis year has seen growth stocks trounce their value peers, in a sharp reversal of 2022’s pattern. But it hasn’t always been smooth: Momentum has shifted on a dime more than once this year, with technology, energy, banks, and other sectors in and out of favor.
The
S&P 500
Growth index has returned more than 24% year to date, doubling the S&P 500 Value’s 12% return including dividends. The March U.S. regional-bank turmoil hit the value index—which has a significant weight in financials—and more economically sensitive shares. Around the same time, the excitement over artificial intelligence shifted into high gear, setting off a rally in
Nvidia
(ticker: NVDA) and other merely tangentially AI-exposed growth stocks.
What next? There is a range of economic outcomes being debated for 2024 with different implications for the path of interest rates and inflation—and thereby the macro case for growth or value outperformance.
Perhaps stocks that show attributes of growth, value, and momentum investing styles can sail through the turbulence. Barron’s screened the
Russell 1000 index
for stocks that are meaningfully cheaper than the index, are expected to grow earnings faster next year, and have outperformed the market this year and since the summer.
The Russell 1000 has returned around 15% since the start of the year, but it’s down nearly 5% from its late-July peak. The screen started with stocks that have done better than the index in both periods—they have positive momentum. That yielded 176 names.
The Russell 1000 trades for 18.4 times expected 2024 earnings and 8.5 times next year’s forecast cash flow. Next, we cut the list to 44 stocks that trade for less than the index’s valuation on both metrics.
Finally, the companies must be expected to beat the Russell 1000’s 11% forecast earnings growth in 2024. That reduced the screen to just eight stocks.
As with any screen, it is merely a starting point for further analysis. Here’s the list:
| Company / Ticker | Market Cap (bil.) | 2024E P/E | 2024E P/CF | 2024E EPS Growth | YTD Return | Return Since 7/31 |
|---|---|---|---|---|---|---|
| Targa Resources / TRGP | $19.0 | 13.3 | 6.1 | 28.6% | 21.9% | 7.4% |
| Jabil / JBL | $16.0 | 12.5 | 7.5 | 11.6% | 87.0% | 15.0% |
| Range Resources / RRC | $8.3 | 10.7 | 6.0 | 41.1% | 42.4% | 12.7% |
| Celanese / CE | $12.7 | 9.5 | 7.0 | 35.9% | 20.3% | -3.7% |
| Charter Communications / CHTR | $61.3 | 11.0 | 4.0 | 17.8% | 22.6% | 2.6% |
| NRG Energy / NRG | $10.3 | 6.6 | 4.8 | 20.9% | 49.7% | 21.5% |
| Southwestern Energy / SWN | $7.6 | 6.5 | 2.8 | 60.9% | 20.3% | 8.6% |
| Diamondback Energy / FANG | $28.4 | 7.4 | 4.7 | 16.2% | 20.9% | 9.3% |
Source: FactSet, Bloomberg
The best-represented industry in the screen is energy, particularly mid-cap U.S. exploration and production firms. Oil prices have held in there, comfortably above $75 a barrel in the U.S. for most of this year. That’s a price level that means ample profits for most producers and the ability to pay down debt, boost dividends, and spend on share buybacks.
Where energy demand goes in a 2024-recession scenario is an open question, but the outlook for supply remains tight. U.S. producers are returning cash to shareholders rather than boosting production, while Saudi Arabia and its allies have opted to extend their coordinated cuts.
The screen produced four upstream oil-and-gas companies:
Diamondback Energy
(FANG),
Targa Resources
(TRGP),
Range Resources
(RRC), and
Southwestern Energy
(SWN).
NRG Energy
(NRG) is also spending plenty on share buybacks, after pressure from activist investor Elliott Management. Shares are cheap relative to the market and peers as the Texas-based utility company reshuffles its portfolio via the acquisition of Vivint Smart Home, now called NRG Home, and the sale of its stake in a nuclear power plant.
The overhaul means more costs this year, setting up NRG for expected 21% earnings growth next year as those costs recede and buybacks reduce the number of shares outstanding.
Celanese
(CE) also passes the screen. It’s a big player in plastics and other chemical raw materials used in a range of industries and end markets, including automotive, industrial, medical, and consumer products. The company has been dealing with a tough market in Europe and China this year, and it’s undoubtedly an economically sensitive business.
Depending on how the economy performs in 2024, Celanese’s results could be a lot stronger—or weaker. For now, analyst consensus calls for earnings per share growth of about 21% next year.
Charter Communications (CHTR) stock has rebounded this year after a brutal 2022 that saw it lose nearly half its value. Investors are still concerned about slowing growth in the broadband internet market, but cable remains a highly cash-generative business and Charter has a long track record of funneling money to share buybacks—keeping earnings per share growing at a faster pace.
Shares of contract electronics manufacturer
Jabil
(JBL) certainly have momentum: they have already soared 87% this year.
“After the tremendous stock performance, is there still room for upside going forward?” asked Raymond James analyst Melissa Fairbanks in a recent report. “We believe the answer is categorically yes.”
She credits JBL management for restructuring and investing in growth areas like electric vehicles, cloud computing, and renewables. Despite the year-to-date gains, Jabil shares still trade for less than 13 times expected earnings and under 8 times cash flow in 2024.
Write to Nicholas Jasinski at [email protected]
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