Citi strategists highlight growth stocks amid rising bond yields

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Citi strategists highlight growth stocks amid rising bond yields
Credit: © Reuters.

Monday's market saw the Russell 1000 Growth Index, which includes high-growth companies such as Microsoft (NASDAQ: MSFT ) and Nvidia (NASDAQ: NVDA ), continue a recent trend of decline. The index has experienced a 6% decrease from its peak in late July. Despite this, the index has managed to maintain a year-to-date gain of 24%, driven by investor interest in artificial intelligence and increased earnings estimates.

The dip in growth stocks is partly attributable to rising bond yields. The 10-year Treasury yield has been on an upward trajectory, reducing the value of future profits. This trend is particularly significant for growth companies whose valuation often hinges on profits expected to be realized in future years.

However, if bond yields cease to rise, some growth stocks could appear increasingly attractive. A halt in yield increases might stabilize valuations and potentially lead to stock price increases over time.

Citi's strategists have identified several such growth stocks that have become more appealing during the recent downturn. They selected stocks that have fallen more than 10% from their annual highs and whose free-cash-flow estimates have been raised by analysts since the end of March. Furthermore, these companies need to have five-year free-cash-flow estimates exceeding their current implied market capitalizations. This could suggest that these companies' cash flow potentials are being undervalued by investors.

Among the identified stocks are Paycom (NYSE: PAYC ) Software, MongoDB (NASDAQ: MDB ), Rockwell Automation (NYSE: ROK ), Las Vegas Sands (NYSE: LVS ), Bruker (NASDAQ: BRKR ), DraftKings (NASDAQ: DKNG ), and Lockheed Martin (NYSE: LMT ). Lam Research (NASDAQ: LRCX ), a provider of equipment for chip manufacturers, also emerged as a promising option. Its stock has dropped 14% from its annual high, but its free-cash-flow estimates have surged almost 24% since March. This is largely due to an anticipated increase in demand for chip manufacturing equipment as artificial intelligence needs grow within the cloud business sector.

Pinterest (NYSE: PINS ) also caught strategists' attention. Despite a 12% decrease from its annual peak, Pinterest's free-cash-flow estimates have risen slightly since March. While advertising spending has slowed, the social media platform expects sales growth of nearly 20% per year as it monetizes its overseas user base, which could lead to significant profit margin expansion.

Other promising stocks include Intuitive Surgical (NASDAQ: ISRG ), whose share price has fallen 18% from its annual high due to concerns over new weight-loss drugs potentially reducing the need for bariatric surgeries. However, the company has stated that these surgeries only contribute a small percentage of its total revenue.

Chipotle Mexican Grill (NYSE: CMG ) also made the list, with its stock down about 13% from its annual high. Despite this, free-cash-flow estimates have risen around 8% since March. The fast-food chain has consistently exceeded profit forecasts and is expected to maintain annual sales growth in the low teens, reaching over $14 billion by 2026.

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