The Russell 1000 Growth Index Presents a Buying Opportunity on a Pullback
The Russell 1000 Growth Index has recently experienced a decline from its year-to-date highs, creating an opportunity for investors to buy into the growth trend at a lower price. This index, which represents broader growth leadership, has generated a 25% total return in 2023 and reached its peak of 34% on July 19. However, since then, it has pulled back by more than 6%, accompanied by significant variations in individual stock performances, as noted by strategist Scott Chronert.
Key Findings and Implications
Chronert highlights that almost two-thirds of the stocks within the index have fallen by 10% or more from their 2023 highs, with one-third of the stocks being more than 20% below their year-to-date peaks. This indicates that there is greater pressure on individual stocks than what is reflected in the overall index price movement. He believes this presents an attractive medium-term setup for growth investments, offering a margin of safety for fundamentals.
Citi’s Screening Criteria
Citi has screened for growth stocks that meet certain criteria for consideration on a pullback. The selected stocks must have a buy rating from the firm, assign at least 75% of their market capitalization to growth-style per Russell, be down 10% or more from their year-to-date highs (after March 31), and have consensus free cash flow per share estimates above March 31 levels. Additionally, their FY5 free cash flow per share should be greater than or equal to market-implied estimates.
Highlighted Stocks
Several stocks have met Citi’s screening criteria and are worth considering:
Lockheed Martin
Defense and aerospace company Lockheed Martin is currently down 18% from its high in April 2023. However, the company’s consensus estimate for free cash flow per share has increased by nearly $5 since the end of March. Lockheed Martin has faced challenges with its aircraft suppliers and recently lowered its full-year delivery forecast for F-35 jets. Despite these setbacks, the stock has fallen by 15% year to date.
Image-sharing company Pinterest has experienced a modest rally following its recent investor day, but its shares are still down 14% from their year-to-date highs. Nevertheless, the stock has seen an 8.8% increase in 2023. Pinterest’s management expects revenue expansion of approximately 8% this year, following a slowdown in 2022 and 2023. Furthermore, the full-year free cash flow per share estimate has increased by $2.03 since the end of the first quarter.
Nvidia
Chipmaker Nvidia has enjoyed a remarkable surge of over 188% year to date. However, the stock has declined by 18% from its peak in late August. While some may view Nvidia as overbought due to its significant rally, the average price target suggests that shares could still rise by an additional 47.7% from the closing price on Friday. Almost 95% of analysts covering the stock rate it as a buy.
KLA
Dutch-based chipmaker KLA has seen a 14% decline from its peak in 2023. Nonetheless, the stock remains more than 20% higher for the year.
