In this piece, we will take a look at the 12 best cheap growth stocks to buy now. If you want to skip our overview of growth investing, then check out 5 Best Cheap Growth Stocks To Buy Now.
If there’s one thing that can be said with certainty about the stock market, it’s that growth is every investor’s dream. After all, the main reason anyone really invests in stocks is to make large sums of money. Otherwise, and particularly in today’s high interest rate environment, bank accounts, and money market funds also provide stable income that sees capital comfortably grow in value if left untouched.
When it comes to stocks, the best money making securities are growth stocks. These are shares of firms with considerable technological or other advantages that are reflected in their share price as investors flock to them with the hope of profiting from share price appreciation. Typically, growth stocks are defined through their price to earnings ratio, with a higher P/E indicating a higher premium being paid for a company’s shares over its ability to translate revenue into profit per share. When analyzing stocks, investors use several different kinds of price to earnings ratios. The most commonly used P/E ratio is the current P/E ratio which divides the current share price with the latest fiscal year earnings per share. Other ratios are the price to trailing earnings ratio which divides the share price with the EPS of the four latest quarters and the price to forward earnings ratio which uses the projected value for earnings per share.
However, in stock analyses, a standalone ratio or reading is not particularly relevant. For P/E ratios, they are compared either with the broader market, through index values such as the S&P500, or industry values. Individual company P/E ratios are benchmarked against them, and the higher the ratio is relative to the index or industry readings, the greater a firm’s growth potential is thought to be.
Delving further into growth stocks, the very nature of their valuations lends them risks that might be absent from other stock market sectors such as value stocks. This is because investing in a growth stock is investing in the future, and naturally future returns are never guaranteed. For growth stocks, this means that money flows into them when the broader economic picture is stable, and as we saw in 2022, if this is not the case, then growth stocks fall from their highs rather fast as money flows into stable sectors such as consumer staples or safe haven investments such as the U.S. dollar and gold.
At the same time, the bifurcation between a stock’s fundamental value and broader market movements also creates an opportunity to profit from growth stocks in a turbulent stock market. A stock’s fundamental value is based on its balance sheet and other financial and operational metrics. It tests whether a firm’s financials are fundamentally solid to help with future revenue growth, and if this is the case, then the company is marked for solid growth. A great example of this phenomenon is the stock of Advanced Micro Devices, Inc. (NASDAQ:AMD).
AMD is the only company in the world apart from Intel Corporation (NASDAQ:INTC) that sells the bedrock of modern day computing, processors designed through x86 microarchitecture, and naturally, this means that the company has an easily available market at its disposal should it match its larger rival in performance and price. While AMD is a profitable company these days, its P/E ratio was touching 250 in 2019 as low earnings left a wide margin from the share price that reflected investor belief about AMD’s ability to catch up with Intel. AMD’s unbelievable P/E ratio, especially for a firm with an established market, business processes, and products is not a thing of the past either as right now, the stock has a stunning trailing P/E ratio of 1,032.64. This has partly been helped by the firm’s third quarter of 2023 earnings which saw a recovery in its PC market and optimism from its CEO surrounding the future of its artificial intelligence products.
The ability to profit from growth stocks during turbulence depends on the broader market valuations. A tough economy depresses valuations regardless of a firm’s fundamentals, and these days, there is a thought segment that believes that undervaluation might be in play. One such proponent is none other than the Bank of England. In its latest financial policy summary for the third quarter, the central bank cautioned:
Given the impact of higher interest rates, and uncertainties associated with inflation and growth, some risky asset valuations appear stretched. Stretched risky asset valuations increase the likelihood of a greater correction in prices if downside risks to growth materialise. This would have a direct impact on the cost and availability of finance for corporates globally, and would affect riskier borrowers in particular.
Further material increases in risk-free interest rates, or a significant re-appraisal of credit risk globally, could also be amplified by vulnerabilities elsewhere in the system of market-based finance, with a broader potential impact on financial stability.
On the flip side, data from Morningstar shows that the price to fair value of 700 U.S. stocks stood at 0.89 as of October 31st, which represents an 11% discount to the fair value. According to the financial research firm, the market has traded at this discount for only 12% of the time since 2011. As a result, Morningstar concludes:
As such, based on our valuations, we continue to advocate for an overweight position in value, underweight in core/blend, and market weight in growth.
So, in this environment, what are the stocks that one might pick as cheap growth stocks? We took a look to see which cheap growth stocks hedge funds are buying and the top three stocks in this list are Alphabet Inc. (NASDAQ:GOOGL), Meta Platforms, Inc. (NASDAQ:META), and Visa Inc. (NYSE:V).
Photo by Ruben Sukatendel on Unsplash
Our Methodology
To compile our list of the best cheap growth stocks to buy, we first ranked the 40 largest components of the Vanguard Growth ETF (VUG.IV) by their price to trailing earnings ratio. Then, the 20 stocks with the lowest P/E ratios were selected. To make the list of the best cheap growth stocks, we re-ranked these stocks by the number of hedge funds that had invested in them as of Q2 2023, and the top cheap growth stocks are as follows.
Best Cheap Growth Stocks To Buy Now
12. Lam Research Corporation (NASDAQ:LRCX)
Latest Price To Earnings Ratio: 21.97
Number of Hedge Fund Investors In Q2 2023: 69
Lam Research Corporation (NASDAQ:LRCX) is an industrial equipment provider that caters to the needs of the semiconductor industry. Among the numerous semiconductor stocks that trade on the market, Lam Research Corporation (NASDAQ:LRCX) is among the few with 88% ownership by institutional investors. Given the company’s importance in the global chip supply chain, this leaves the stock vulnerable to a massive sell off if its products are prohibited from being sold to countries such as China or a wider disruption in the chip market.
As of Q2 2023 end, 69 out of the 910 hedge funds part of Insider Monkey’s database had bought Lam Research Corporation (NASDAQ:LRCX)’s shares. Ken Fisher’s Fisher Asset Management owns the largest stake among these, which is worth $1.8 billion.
Along with Meta Platforms, Inc. (NASDAQ:META), Alphabet Inc. (NASDAQ:GOOGL), and Visa Inc. (NYSE:V), Lam Research Corporation (NASDAQ:LRCX) is a top undervalued growth stock to buy.
11. NIKE, Inc. (NYSE:NKE)
Latest Price To Earnings Ratio: 33.76
Number of Hedge Fund Investors In Q2 2023: 70
NIKE, Inc. (NYSE:NKE) is a globally recognized apparel and footwear brand. A consumer discretionary stock, its performance depends on inflation and economic growth and NIKE, Inc. (NYSE:NKE)’s third quarter earnings saw it beat analyst EPS estimates by a wide margin.
During 2023’s June quarter, 70 out of the 910 hedge funds profiled by Insider Monkey had invested in the company. NIKE, Inc. (NYSE:NKE)’s biggest hedge fund shareholder is Ken Fisher’s Fisher Asset Management as it owns 9.5 million shares that are worth $1 billion.
10. Linde plc (NYSE:LIN)
Latest Price To Earnings Ratio: 32.44
Number of Hedge Fund Investors In Q2 2023: 70
Linde plc (NYSE:LIN) is a British industrial raw materials provider that sells gasses. It’s the first stock on our list that is rated Strong Buy on average, and analysts have set an average share price target of $423.99.
For their second quarter of 2023 shareholdings, 70 out of the 910 hedge funds polled by Insider Monkey were Linde plc (NYSE:LIN)’s investors. Alexander Mitchell’s Scopus Asset Management owns the biggest stake among these which is worth $44.5 million.
9. Applied Materials, Inc. (NASDAQ:AMAT)
Latest Price To Earnings Ratio: 19.03
Number of Hedge Fund Investors In Q2 2023: 72
Applied Materials, Inc. (NASDAQ:AMAT) is the second semiconductor stock on our list, which is unsurprising given the depressed valuations in the sector due to a slow chip industry. The slowdown hasn’t stopped the firm from performing well financially though, since it has beaten analyst EPS estimates in all four of its latest quarters.
Insider Monkey dug through 910 hedge fund portfolios for this year’s June quarter to find that 72 had bought the firm’s shares. Applied Materials, Inc. (NASDAQ:AMAT)’s largest hedge fund shareholder is David Blood and Al Gore’s Generation Investment Management due to its $1.2 billion investment.
8. Booking Holdings Inc. (NASDAQ:BKNG)
Latest Price To Earnings Ratio: 21.36
Number of Hedge Fund Investors In Q2 2023: 76
Booking Holdings Inc. (NASDAQ:BKNG) is a travel services provider that enables users to plan their trips. As the conflict between Israel and Palestine once again saps the global travel industry, the firm’s CEO is adamant that people love to travel and investors should keep this in mind.
For their second quarter of 2023 shareholdings, out of the 910 hedge funds tracked by Insider Monkey, 76 had held a stake in Booking Holdings Inc. (NASDAQ:BKNG). Peter Rathjens, Bruce Clarke, and John Campbell’s Arrowstreet Capital owns the biggest stake among these, which is worth $1.3 billion.
7. Danaher Corporation (NYSE:DHR)
Latest Price To Earnings Ratio: 24.82
Number of Hedge Fund Investors In Q2 2023: 89
Danaher Corporation (NYSE:DHR) is an American healthcare company that provides products to laboratories and pharma companies. Its shares are rated Buy on average and analysts have priced in a $50 upside based on the average share price target of $246.83.
As of June 2023, 89 among the 910 hedge funds surveyed by Insider Monkey had bought the firm’s shares. Danaher Corporation (NYSE:DHR)’s largest hedge fund shareholder is Andreas Haloversen’s Viking Global since it owns 4.8 million shares that are worth $1 billion.
6. Thermo Fisher Scientific Inc. (NYSE:TMO)
Latest Price To Earnings Ratio: 29.77
Number of Hedge Fund Investors In Q2 2023: 103
Thermo Fisher Scientific Inc. (NYSE:TMO) is a medical and research equipment provider for the healthcare industry. The firm is currently seeking to expand its global operations footprint, as it is interested in acquiring a proteomics company.
103 out of the 910 hedge funds surveyed by Insider Monkey during Q2 2023 were Thermo Fisher Scientific Inc. (NYSE:TMO)’s shareholders. Chris Hohn’s TCI Fund Management is the biggest investor among these as it owns $1.6 billion worth of shares.
Alphabet Inc. (NASDAQ:GOOGL), Thermo Fisher Scientific Inc. (NYSE:TMO), Meta Platforms, Inc. (NASDAQ:META), and Visa Inc. (NYSE:V) are some top undervalued growth stocks.
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Disclosure: None. 12 Best Cheap Growth Stocks To Buy Now is originally published on Insider Monkey.