In this piece, we will take a look at the ten oversold growth stocks to buy. If you want to skip our introduction to the stock market and growth investing, then head on over to 5 Oversold Growth Stocks To Buy.
Growth is one of the most popular words these days. Whether it's growth in the job market, growth in inflation, interest rates, or the economy, analysts and economists keenly reading any new data set to see what the tone will be for the stock market over the next couple of months.
Right now, GDP growth is one of the hottest topics in the market, since this metric might be the one that ends up providing the Federal Reserve with more leeway in raising interest rates. Currently, interest rates in America are at multi-decade highs, and the central bank has started to slow down the pace recently as it evaluates whether the economy can withstand more pressure without contracting significantly and causing large losses. America's GDP grew by 2.4% in Q2 2023 which provided the Federal Reserve with some relief as it could take comfort in knowing that high interest rates have not been as damaging as initially feared. The strong GDP growth has also made big ticket banks, such as JPMorgan and Bank of America, revise their earlier estimates of a potential recession in America.
Growth investing involves taking high risks with the hope of even higher rewards. As opposed to value investing, where the main goal of the investor is to gauge a differential between the implied and actual share price of a firm and take advantage if the former is higher, growth investing focuses on those companies whose shares are valued higher on the market than their book value might suggest. For the uninitiated, the book value of a stock is simply the firm's liabilities deducted from its assets and it is the value that the shareholders of a firm will receive in the unfortunate case of a liquidation. The book value is an important indicator in stock analysis as it provides an estimate of the true worth of an investment or a stock and therefore becomes a benchmark with which market prices are compared to determine under or overvaluation.
In growth investing, the fundamental premise is that even though the book value of a company might be lower than its market price, over time it will grow due to strong market performance. Subsequently, it is not for the faint of heart and requires patience and holding the shares over a long time period to benefit from share price growth. Apart from the book value, another important financial ratio that is used to sift out growth stocks is the price to earnings ratio. While the book value, often converted into the price to book value per share, sees the current payout to a shareholder, the price to earnings ratio measures the valuation premium for a firm in the stock market compared to the money that it earns after expenses, taxes, and other obligations are deducted. The higher the P/E ratio is, the more the market expects the firm to grow its earnings in the future and this optimism is reflected in the share price.
To pick out growth stocks, one can either use the P/E and P/B ratios to make the decisions or leave the stock picking to the professionals and use an exchange traded fund (ETF). An ETF is simply a collection of stocks that issues its own shares and is operated by a broker or another financial firm. There are dozens of ETFs for growth investing, and some with the lowest expense ratios are Vanguard Russell 1000 Growth ETF (NASDAQ:VONG), iShares Morningstar Mid-Cap Growth ETF (NYSE:IMCG), Vanguard Mid-Cap Growth ETF (NYSE:VOT), and iShares Morningstar Small-Cap Growth ETF (NYSE:ISCG).
Another way to pick out stocks, particularly if one cannot be bothered with analyzing a firm's fundamentals and its book value, is technical trading. Within this framework, one tool is called the Relative Strength Index (RSI). This index measures the upward and downward movement in a share price over a time period (generally 14 days) and allows investors to determine if excessive market sentiment is driving the stock up or down. However, the utility of the RSI goes beyond this, since it can also be used to signal whether a bearish or bullish market is on the horizon. This is typically when the RSI fails to move in line with the share price and does not cross previous highs or lows. For instance, the share price might be going up but the RSI might fail to set new overbought levels, in what is generally thought to be a bearish indicator.
With these details in mind, let's take a look at some top oversold growth stocks to buy. Some notable names in this list are Harmonic Inc. (NASDAQ:HLIT), Penumbra, Inc. (NYSE:PEN), and ResMed Inc. (NYSE:RMD).
To compile our list of the most oversold growth stocks to buy, we made a list of stocks with a price to trailing earnings ratio higher than 25, an RSI score lower than 30, and average analyst ratings of Buy or higher.
Edwards Lifesciences Corporation (NYSE:EW) is an American firm headquartered in Irvine, California. It sells a variety of medical devices such as catheters for heart valve replacement and repair alongside patient monitoring systems. The firm had a strong Q2 2023, managing to beat analyst estimates by a wide margin. Edwards Lifesciences Corporation (NYSE:EW)'s shares are rated Buy on average, and RBC Capital maintained an Outperform rating in August.
Insider Monkey took a look at 943 hedge fund portfolios for their Q1 2023 investments and discovered that 47 had bought and owned Edwards Lifesciences Corporation (NYSE:EW)'s shares. Out of these, the largest investor is Ken Fisher's Fisher Asset Management since it owns 7.8 million shares that are worth $646 million.
Along with Penumbra, Inc. (NYSE:PEN), Harmonic Inc. (NASDAQ:HLIT), and ResMed Inc. (NYSE:RMD), Edwards Lifesciences Corporation (NYSE:EW) is a strong oversold growth stock.
Mueller Water Products, Inc. (NYSE:MWA) is one of the oldest companies on our list. It was set up in 1857 and is headquartered in Atlanta, Georgia. The firm provides industrial grade water flow management and infrastructure products. Its second quarter results were underwhelming, as Mueller Water Products, Inc. (NYSE:MWA) missed analyst EPS estimates and reported annual revenue, operating income, and net income drops.
During this year's first quarter, 19 of the 943 hedge funds part of Insider Monkey's database had invested in the company. Mueller Water Products, Inc. (NYSE:MWA)'s biggest shareholder in our database is Ian Simm's Impax Asset Management through a $204 million stake that comes courtesy of 14.6 million shares.
The Chefs' Warehouse, Inc. (NASDAQ:CHEF) is a food distribution company headquartered in Ridgefield, Connecticut. It is a consumer defensive firm with tens of thousands of different stock keeping units in its portfolio. Q2 2023 earnings lagged analyst EPS estimates, but the stock is rated a Strong Buy on average based on analyst coverage as of May. The Chefs' Warehouse, Inc. (NASDAQ:CHEF)'s second quarter results saw it report 36% in annual revenue growth but also post profit drops as it struggled with high inflation.
By the end of March 2023, 24 of the 943 hedge funds surveyed by Insider Monkey had bought The Chefs' Warehouse, Inc. (NASDAQ:CHEF)'s shares. Joe Milano's Greenhouse Funds is the largest investor among these, courtesy of its $74.9 million stake.
NextEra Energy Partners, LP (NYSE:NEP) is a utility company headquartered in Florida. It focuses its efforts on generating power through renewable energy projects. The shares are rated Buy on average, and the latest rating came from Morgan Stanley in June when the bank reiterated an Equal Weight rating for the stock.
Insider Monkey scoured through 943 hedge funds for their first quarter of 2023 investments and discovered that 24 had invested in NextEra Energy Partners, LP (NYSE:NEP).
Digi International Inc. (NASDAQ:DGII) is an American technology firm. It primarily sells products that are used in the Internet of Things (IoT) ecosystem to allow firms to set up data centers and manage connected devices. The firm's shares effectively erased all gains they had made since early May in early August right around the time it reported its earnings for the third quarter of fiscal 2023.
19 of the 943 hedge funds part of Insider Monkey's Q1 2023 database had bought Digi International Inc. (NASDAQ:DGII)'s shares. Richard Driehaus' Driehaus Capital is the largest investor out of these through a stake worth $32 million.
Harmonic Inc. (NASDAQ:HLIT), Digi International Inc. (NASDAQ:DGII), Penumbra, Inc. (NYSE:PEN), and ResMed Inc. (NYSE:RMD) are some top oversold growth stocks on our list.
