3 Top Stocks for Growth Investors to Buy Now

This video provides an in-depth exploration of identifying undervalued growth stocks in a generally overvalued market, specifically focusing on mid-sized companies with strong economic moats. The presenter, Susan Dziubinski from Morningstar, begins by establishing the challenging market context for growth investors, noting that growth stocks, particularly large-cap ones, are significantly overvalued according to Morningstar's metrics. This sets the stage for a strategic shift towards mid-sized growth companies, where more attractive, undervalued opportunities are believed to exist.

The core methodology presented involves selecting stocks that not only fall into the mid-growth portion of the Morningstar style box but also possess economic moats. An economic moat, as defined by Morningstar, signifies a company's ability to maintain a competitive advantage for a decade or more. The video then delves into three specific stock recommendations that meet these criteria: Veeva Systems (VEEV), Rentokil Initial (RTO), and Dexcom (DXCM), providing a brief analysis of each company's business, its assigned economic moat rating, recent financial performance, and Morningstar's fair value estimate.

The discussion highlights the importance of combining quality (economic moat) with valuation (undervalued status) for attractive investment opportunities. For each recommended stock, the video explains the basis of its economic moat, such as high customer retention and switching costs for Veeva, cost advantages for Rentokil, and intangible assets like intellectual property and a strong reputation for Dexcom. It also addresses recent operational or market challenges faced by these companies, which have contributed to their current undervaluation, alongside management's efforts to address these issues and Morningstar's outlook for future stability and growth.

This segment serves as a practical guide for growth investors seeking to navigate a challenging market by focusing on fundamentally strong, competitively advantaged companies that are currently trading below their intrinsic value. The insights are grounded in Morningstar's proprietary research and valuation frameworks, offering a clear, data-backed approach to stock selection.

Key Takeaways:

• Challenging Market for Growth Investors: Growth stocks, especially large-cap ones, are generally overvalued, trading 14-16% above Morningstar's fair value estimates, making it difficult to find attractive opportunities.
• Focus on Mid-Sized Growth Companies: To uncover undervalued growth stocks, investors should consider mid-sized companies, as this segment offers more opportunities compared to the overvalued large-cap space.
• Importance of Economic Moats: A crucial selection criterion is a company's economic moat, which indicates its ability to sustain competitive advantages for at least a decade, ensuring long-term profitability and stability.
• Veeva Systems (VEEV) as a Top Pick: Veeva is identified as the leading provider of cloud-based software solutions in the life sciences industry, a sector highly relevant to IntuitionLabs.ai's focus. It boasts a "wide economic moat" due to high customer retention and significant switching costs.
• Veeva's Recent Performance and Valuation: Despite management cutting guidance in late 2023, Veeva reported better-than-expected quarterly results in August, leading to an upward revision of guidance. Morningstar considers the stock undervalued, with a fair value estimate of $273 per share.
• Rentokil Initial (RTO) for Cost Advantages: Rentokil, the world's largest commercial pest-control business, holds a "wide economic moat" primarily due to its cost advantages. The stock's recent struggles are attributed to issues in its North American business, which management is actively addressing.
• Rentokil's Undervaluation: Morningstar believes Rentokil stock is appealing, trading well below its fair value estimate of $40.30, as management works to resolve weaknesses like under-resourcing in sales/marketing and employee retention challenges.
• Dexcom (DXCM) in Medical Devices: Dexcom, a manufacturer of continuous glucose monitoring systems for diabetic patients, is another recommended stock. Its economic moat was recently upgraded to "narrow," underpinned by scale, profitability, intellectual property, innovation, and a strong reputation.
• Dexcom's Operational Challenges and Outlook: The stock has faced a significant decline (down 40% this year) due to operational issues impacting revenue growth and margins. However, Morningstar anticipates stability to return in 2025, valuing the stock at $94 per share.
• Combining Quality and Valuation: The overarching strategy involves identifying companies with strong fundamental quality (economic moats) that are currently trading at undervalued prices, offering a compelling entry point for growth investors.
• Morningstar's Research-Backed Approach: The recommendations are based on Morningstar's proprietary metrics, including their style box for categorizing growth companies, economic moat ratings, and fair value estimates derived from in-depth analyst research.

Key Concepts:

• Economic Moat: A sustainable competitive advantage that allows a company to earn excess returns on capital for an extended period (e.g., a decade or more). Morningstar categorizes moats as "wide" (very strong, long-lasting advantage) or "narrow" (present, but less certain or shorter-lived).
• Fair Value Estimate: Morningstar's assessment of a stock's intrinsic value, based on fundamental analysis, which investors can compare to the current market price to determine if a stock is undervalued or overvalued.
• Morningstar Style Box: A proprietary tool used to categorize stocks based on their size (large, mid, small) and investment style (value, blend, growth). The video specifically focuses on the "mid-growth" portion.
• Growth Stocks: Companies expected to grow earnings and revenue at a faster rate than the overall market, often reinvesting profits back into the business rather than distributing them as dividends.
• Undervalued Stocks: Stocks trading below their intrinsic or fair value, presenting a potential buying opportunity for investors who believe the market has mispriced them.
• Customer Retention & Switching Costs: Factors contributing to an economic moat, where high customer retention means customers stay with a product/service, and high switching costs make it expensive or difficult for customers to move to a competitor.
• Intangible Assets: Non-physical assets such as intellectual property (patents, trademarks), brand reputation, and innovative capabilities that can provide a significant competitive advantage.

Examples/Case Studies:

• Veeva Systems (VEEV): Highlighted as a prime example of a company with a wide economic moat in the life sciences software sector, driven by its high customer retention and the significant costs associated with switching to a competitor's system.
• Rentokil Initial (RTO): Presented as a global leader in commercial pest control, whose wide economic moat stems from its cost advantages, allowing it to operate more efficiently than rivals.
• Dexcom (DXCM): Used as an illustration of a medical device company whose competitive advantage (narrow moat) is built on intangible assets like its intellectual property, a strong track record of innovation in continuous glucose monitoring, and a sterling reputation in the healthcare industry.