MGK - MGK: Growth Is Likely To Outshine Value In 2024

2024-01-21 07:42:52 ET

Summary

• Growth stocks and ETFs are expected to outperform in 2024, with tech stocks likely to drive the uptrend.
• Mega-cap tech giants, such as Microsoft, Alphabet, Meta Platforms, and Amazon, are investing heavily in artificial intelligence, which will contribute to earnings growth.
• The valuations of the growth category are high, but the risk of a price correction is limited, and potential earnings growth will stabilize the P/E ratio.

Is it the right time to exit growth stocks and ETFs after stunning gains in 2023? I don’t think it is the right time to exit despite lofty valuations. I do not expect a big price correction risk in 2024 or underperformance for the growth category. Indeed, I expect growth ETFs such as Vanguard Mega Cap Growth Index Fund ETF Shares ( MGK ) and Vanguard Growth Index Fund ETF Shares ( VUG ) to extend the bull run and outperform the S&P 500 and a value category. Moreover, like in 2023, tech stocks are likely to drive the uptrend for the entire growth category. While the entire growth category is likely to outperform, I prefer MGK over VUG because of its concentrated mega-cap portfolio.

Growth stocks and ETFs likely to Outperform in 2024

Early last year, I suggested investors dump value over growth because I expected tech stocks to rebound due to a strengthening economic and earnings outlook. The whopping MGK and VUG's share price rally vindicated my opinion . Meanwhile, value-focused ETFs such as Schwab U.S. Large-Cap Value ETF ( SCHV ) struggled to gain investor confidence throughout the year.

I believe the growth category is likely to shine again in 2024. This is because tech stocks, which make up the majority of growth ETF portfolios, appear in a stronger fundamental position than they were in the last year. The growth category and tech stocks historically performed well during periods of economic expansion and financial stability. In 2024, low inflation and potential rate cuts would enhance consumer and business confidence. Moreover, the GDP growth outlook of around 2.5% looks high considering the Fed’s policy. High double-digit earnings growth from tech companies could also be the biggest catalyst for the growth category.

Although tech earnings slowed in 2023, the blockbuster launch of OpenAI’s ChatGPT, backed by Microsoft ( MSFT ), created a long-lasting impact on artificial intelligence and the tech market. Mega-cap tech giants, such as Microsoft, Alphabet ( GOOG ), Meta Platforms ( META ) and Amazon ( AMZN ), have been investing heavily in artificial intelligence to capitalize on growing demand. Goldman Sachs anticipates Microsoft's Azure AI Services to generate $200 billion in revenue potential in the next five years. Amazon CEO Andy Jassy also expects AI to contribute tens of billions of dollars in revenue for Amazon Web Services, Amazon's cloud computing business, in the coming years. Its AWS revenue surged 12% year over year in the third quarter.

According to FactSet data , the information technology sector and tech stocks from communications and consumer cyclical are likely to generate staggering revenue and earnings growth in 2024, supported by the AI revolution and economic stabilization. The information technology sector is expected to generate 17% year-over-year earnings growth in 2024. Tech companies like Meta and Amazon would enable the communication and consumer discretionary sectors to generate double-digit earnings growth for the second year in a row. Wall Street anticipates Meta’s earnings to increase by 67% in 2023 and 21% in 2024. NVIDIA ( NVDA ), the biggest beneficiary of the AI boom because of its advanced chips to power AI in data centres, generated a 206% year-over-year increase in third-quarter revenue. Wall Street expects NVIDIA’s earnings to grow by 266% in 2023 and 63% in the following year. Amazon also returned to profits from a loss in the previous year, with expectations for 33% growth in the next year. Microsoft, Alphabet, and Salesforce ( CRM ) are also set to generate double-digit earnings in 2024.

On the other hand, economic stability would also improve the performance of a value category, but not to the extent of tech companies. The financial sector, which holds the highest weight in the value category, is likely to generate 9% earnings growth in 2024, which doesn’t look impressive given the S&P 500’s average 10% growth and high double-digit growth from the tech, communication and consumer discretionary sectors. Rate cuts from the Fed would negatively impact the financial sector’s earnings in the coming years. The average earnings growth for energy, utilities, real estate and consumer staples stocks is also likely to be significantly below the S&P 500’s average.

Valuations

The valuations of the growth category are significantly higher than the value category. However, if we closely look at the above chart, the value currently trades near the highest levels it saw in 2022. On the other hand, the forward PE of the growth category is still trading below its recent highs. Besides that, despite high valuations, the risk of a price correction for the growth category is limited in 2024. This is because valuations alone do not have the potential to create a significant price correction or a bear market unless they are accompanied by fundamental factors. In 2022, the price plunge was mainly supported by investors’ concerns over rate hikes, inflation, and the recession. The fundamentals for 2024 appear to be significantly different than in 2022. Moreover, the potential earnings growth in 2024 will stabilize the PE ratio and provide room for further upside.

Why Prefer MGK Over VUG?

I prefer MGK over VUG because of its concentrated portfolio. MGK’s portfolio is composed of 85 mega-cap stocks, with the top 10 accounting for 62% of the portfolio. Of the top 10 mega-cap stocks, the magnificent seven, which generated more than 100% share price growth in 2023, account for more than 50% of the portfolio. Besides that, MGK’s portfolio also includes growth stocks from the financial and healthcare sectors, with a combined exposure of 13%. Stocks from these sectors, such as Visa ( V ) and Eli Lilly ( LLY ), have the potential to generate sustainable growth over the long term. Stocks with sustainable growth always help limit the downside in the case of volatility.

On the other hand, VUG offers broader coverage of the large-cap S&P 500 growth category with a portfolio of 211 stocks. As FactSet data indicates that mega-caps, such as Microsoft, NVIDIA, Amazon, and Meta, are likely to be the largest contributors to earnings growth of information technology, communications, and consumer cyclical sectors, I believe moving on with mega-cap stocks with robust earnings growth potential would help in maximizing profits and lowering the downside risk. Meanwhile, VUG’s portfolio includes a large number of unprofitable tech companies that can underperform significantly if a price correction occurs in 2024.

MGK's Quant Rating

Seeking Alpha’s quantitative analysis provided a buy rating to MGK with a quant score of 4.4. Besides dividends, which are not important when chasing returns through share price growth, the rest of its factors achieved a strong quant grade. MGK’s share price momentum earned an A plus score. Momentum is a technical factor that signals that stocks or ETFs with strong momentum are likely to extend the uptrend. An A-plus grade on the liquidity factor demonstrates higher trading volume and large assets under management compared to peers.

In Conclusion

Although tail events always have the potential to alter market performance, the overall risk factor has declined significantly for the growth category in 2024 compared to the last two years. Lower inflation, potential rate cuts, and economic stability have strengthened the fundamentals for tech companies. Moreover, the robust earnings growth outlook is likely to be the key catalyst for the extension of the bull run in 2024. With a portfolio concentration on mega-cap tech stocks, a low expense ratio, and strong liquidity, MGK appears to be a perfect ETF to capitalize on the bull run.

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