The near- and medium-term outlooks for growth stocks have greatly improved in recent weeks. That’s because it appears that the Street has, at long last, realized that relatively small increases in interest rates don’t necessarily portend doom for all growth names. Providing evidence for this assertion, the interest on the ten-year Treasury Note had climbed to 4.28% as of Feb. 16 from 4% at the beginning of the month. Yet the Russell 2000 Index of small-cap firms advanced to 2,032 from 1,983 during the same period.
Earlier in the bull market, when investors were much more wedded to the ridiculous notion that interest rates were nearly 100% determinative of the fate of almost all growth stocks, such a divergence could not have occurred. Of course, the Federal Reserve’s apparent determination to cut rates later this year is also piquing the Street’s interest in growth stocks. In any event, here are three growth names to buy to exploit the Street’s new-found rationality.
Schrodinger (SDGR)
Schrodinger (NASDAQ:SDGR), which uses artificial intelligence to speed up the drug-discovery process, appears to have begun to rally thanks to Nvidia’s (NASDAQ:NVDA) decision to increase its investment in a similar firm.
Specifically, “NVDA raised its stake in Recursion Pharmaceuticals (NASDAQ:RXRX) to $76 million from $50 million,” as I noted in a previous article. Like SDGR, RXRX uses AI to shorten the notoriously arduous process of developing pharmaceuticals.
Since Nvidia’s new purchases of RXRX stock were disclosed on Feb. 14, SDGR stock has rallied 17%.
Also noteworthy is that the forward price-sales ratio of SDGR is 8.4, while that of RXRX is about 48 times. SDGR has collaboration deals with at least six large drug makers, while Recursion only deals with two major drug makers.
Given these points, SDGR has much more room to advance than RXRX over the longer term.
Intel (INTC)
Intel stock should get a boost from Bloomberg’s recent report that it’s in talks to obtain over $10 billion of subsidies from the U.S. to build chip factories here.
Meanwhile, the firm is slated to “provide updates” on its nascent chip-making business on Feb. 21. At the event, it will probably provide information about new customers to boost INTC stock.
Meanwhile, as noted last month, the firm’s Gaudi 2 AI chips are competitive with Nvidia’s (NASDAQ:NVDA) top AI chip, the H100, in multiple categories. INTC’s backlog of orders for these chips reached $2 billion as of the end of last year, while it’s planning to introduce a new product version later this year with a quadrupling of processing power and a doubling of networking bandwidth.
American Express (AXP)
American Express (NYSE:AXP) reported strong fourth-quarter results on Jan. 25 as its revenue climbed 11% versus the same period a year earlier while its bottom line soared 23% to $1.93 billion.
Also notable is that the credit card network predicts revenue will increase 9% to 11% this year, while its earnings per share will rise to $12.65 to $13.15 from $11.21 in 2023.
The firm is getting a big boost from the tremendous prosperity enjoyed by the wealthiest 10% of Americans over the last several years. AXP’s cards tend to cater to well-off consumers. As the bull market continues, upper-income Americans, who own most of the nation’s stocks, will likely increase their spending due to the well-known “wealth effect” on expenditures. That phenomenon should provide the company with another significant lift.
On the date of publication, Larry Ramer held long positions in SDGR and INTC, while his wife held long positions of SDGR, INTC and AXP. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
