Investors seeking growth often have no choice other than paying up for a stock with strong potential. However, there are some stocks that appear to be trading at low valuations relative to their growth potential.
Waters Corp. (NYSE: WAT), Agilent Technologies Inc. (NYSE: A) and Illumina Inc. (NASDAQ: ILMN) are S&P 500 stocks from the medical sector that have been trending lower, despite promising earnings outlooks. These companies develop technologies used by medical and pharmaceutical researchers, as well as in the detection of conditions.
As a whole, the healthcare sector, as tracked by the Health Care Select Sector SPDR Fund (NYSEARCA: XLV), has languished throughout 2023, following a strong performance in 2020 and 2021. That sets the stage for several companies within that sector to be trading at a value relative to their growth prospects.
Growth at a reasonable price (GARP) is an investment strategy that seeks to find stocks with a balance between growth potential and valuation. It combines elements of both growth investing and value investing. GARP investors look for companies that have the potential for above-average earnings increases but at a reasonable price relative to their earnings or other fundamental measures.
Identifying Undervalued Companies
This approach aims to identify companies that are undervalued by the market but have strong growth prospects.
GARP focuses on factors such as earnings growth rates, price-to-earnings ratios, and other valuation metrics to assess the investment potential of a company.
Other considerations include the company's competitive position, industry trends, and financial health.
Here’s a look at three medical research and equipment stocks and the traits that make them GARP candidates.
Waters: Analysts See Growth
Waters makes analytical instruments and software. It specializes in liquid chromatography and mass spectrometry technologies. These are analytical techniques used to separate, identify, and quantify chemical compounds in a sample.
Waters has a growth-y P/E of 23, even with a year-to-date decline of 21.42%.
Analysts expect earnings to grow 5% this year and 11% next year. That’s very healthy for a long-established company that’s no longer growing at red-hot rates.
The company has a relatively new CEO, Udit Batra, who took the helm in September 2020. A new CEO can frequently be a catalyst for further gains in a stock, as he or she brings in fresh ideas and renewed energy for growth.
MarketBeat’s Waters analyst ratings show a price target of $335.27, an upside of 24.54%.
Agilent Technologies: Stock May Have Bottomed
The Agilent Technologies chart shows that the stock may have bottomed out in recent weeks after dropping 18.91% so far this year.
Agilent provides scientific instruments, software, services, and lab supplies for laboratory analysis and diagnostics.
The company has a long history of profitability, and MarketBeat’s Agilent Technologies dividend data show that it pays a yield of 0.74%. That’s not a spectacular yield, but it somewhat offsets price losses.
Earnings have grown steadily, with a three-year earnings growth rate is a healthy 23%. Analysts expect earnings to grow 8% this year and 9% next year. The return on equity is 29%, indicating an efficiently managed company.
Agilent Technologies analyst ratings show a consensus view of “moderate buy” on the stock, with a price target of $151.35 and an upside of 24.95%.
Illumina: Good Estimates Despite Challenges
Illumina has been in the news recently as its CEO resigned amid pressure from hedge fund manager Carl Icahn, an activist investor. The board is currently conducting a search for a new CEO. As noted above, when that new CEO is named, it could eventually result in a strong round of earnings and price gains for the stock.
Illumina is a biotechnology company specializing in genetic sequencing and technologies for genomic research and clinical applications.
Illumina's CEO resignation coincides with an ongoing dispute with activist investor Carl Icahn regarding Illumina’s acquisition of Grail.
The Federal Trade Commission issued an order requiring Illumina to divest Grail, which makes a multi-cancer early detection test. The FTC said the deal would stifle competition and innovation in the U.S. market for life-saving cancer tests.
Although that all sounds messy, analysts still have confidence that the stock has plenty of growth potential. MarketBeat’s Illumina analyst ratings show a consensus rating of “hold” with a price target of $253.70, an upside of 23.23%.