MW 10 growth stocks in the S&P 500's bargain sector
By Philip van Doorn
Only one of the 11 S&P 500 sectors trades at a lower P/E than the full index, while also being expected to increase revenue and profit at a faster pace
There is no shortage of warnings about the U.S. stock market's high valuation, but a deeper look into sectors shows quite a bit of variation.
A screen of 11 sectors of the S&P 500 SPX highlights one sector that stands out for a relatively low price-to-earnings valuation and expected growth rates that are higher than those for the full index.
A high index valuation and broad approaches to counter it
The S&P 500 index trades at a forward price/earnings ratio of 21.9. The U.S. large-cap benchmark stock index is weighted by market capitalization. The index's current forward P/E valuation is 18% higher than its 10-year average valuation.
The cap-weighting makes for a highly concentrated index, with the Magnificent Seven group of companies - Apple Inc. $(AAPL)$, Microsoft Corp. $(MSFT)$, Nvdia Corp. $(NVDA)$, Amazon.com Inc. $(AMZN)$, Alphabet Inc. $(GOOGL)$, Meta Platforms Inc. $(META)$ and Tesla Inc. $(TSLA)$ - making up 32% of the portfolio of the SPDR S&P 500 ETF SPY Trust as of Monday.
Brett Arends recently looked at the S&P 500's concentration and explained why recent volatility underscores the need for some investors to rethink their strategies.
One way to take less risk while still investing in the S&P 500 is to take a broader or equal-weighted approach, such as that followed by the Invesco S&P 500 Equal Weight ETF RSP. You might even consider a fund holding stocks in the S&P 500 that are weighted by characteristics tied to a particular strategy, such as the Invesco S&P 500 Pure Growth ETF RPG.
But some investors want to select individual stocks within sectors that they believe might be undervalued.
One standout sector in the S&P 500
Here are the 11 sectors of the S&P 500, ranked by forward P/E ratios, with the full index at the bottom. The table includes projected compound annual growth rates (CAGR) for revenue and earnings per share from 2024 through 2026, based on consensus estimates among analysts polled by FactSet. The estimates are adjusted for companies whose fiscal reporting periods don't match the calendar.
Sector or index Forward P/E Forward P/E to 10-year average Projected revenue CAGR through 2026 Projected EPS CAGR through 2026
Consumer Discretionary 30.2 112% 6.1% 13.4%
Information Technology 27.3 133% 11.4% 19.3%
Industrials 22.8 118% 5.8% 17.2%
Consumer Staples 22.2 112% 3.6% 6.5%
Communication Services 21.0 111% 6.5% 13.1%
Materials 20.2 119% 2.7% 14.0%
Healthcare 18.0 109% 6.3% 15.4%
Real Estate 17.8 94% 6.5% 5.4%
Utilities 17.7 101% 4.8% 8.2%
Financials 17.1 118% 6.1% 11.2%
Energy 14.0 100% 0.6% 10.1%
S&P 500 21.9 118% 5.9% 13.9%
Source: FactSet
You might need to scroll the table to see all of the data.
The healthcare row on the table is bolded because this is the only sector that trades at a lower P/E than that of the full S&P 500 while also having projected revenue and EPS CAGR that are both higher than those of the full index.
The sectors of the S&P 500 are also weighted by market capitalization. So if you invest in the entire healthcare sector through an index fund, such as Health Care Select Sector SPDR ETF XLV, your money will be invested in all 61 stocks in the healthcare sector, but Eli Lilly & Co. $(LLY)$ alone makes up 11.9% of the portfolio. The top five holdings, also including UnitedHealth Group Inc. $(UNH)$, Johnson & Johnson, $(JNJ)$ AbbVie Inc. $(ABBV)$ and Merck & Co. $(MRK)$, make up a combined 39% of the XLV portfolio.
You can also invest in the large-cap U.S. healthcare sector on an equal-weighted basis with the Invesco S&P 500 Equal Weight Health Care ETF RSPH, which also holds all 61 stocks but is rebalanced quarterly to an equal weighting.
A healthcare sector growth screen
Here are the 10 companies in the S&P 500 healthcare sector expected to show the highest revenue CAGR through 2026. That is the only driver for this first screen, although projected EPS growth rates are also shown, along with forward P/E ratios.
Company Ticker Projected revenue CAGR through 2026 Projected EPS CAGR through 2026 Forward P/E
Eli Lilly and Co. LLY 24.6% 51.0% 34.6
Insulet Corp. PODD 17.9% 24.2% 69.3
Intuitive Surgical Inc. ISRG 15.3% 13.7% 70.5
DexCom Inc. DXCM 14.9% 20.9% 42.1
Boston Scientific Corp. BSX 11.7% 14.0% 36.2
UnitedHealth Group Inc. UNH 10.3% 10.1% 18.2
Incyte Corp. INCY 9.6% 137.3% 12.0
McKesson Corp. MCK 9.5% 13.0% 16.6
Vertex Pharmaceuticals Inc. VRTX 9.0% 553.1% 25.0
Bio-Techne Corp. TECH 8.6% 13.1% 35.0
Source: FactSet
Eli Lilly tops the list with a 24.6% projected sales CAGR for the next two years, and a whopping 51% projected EPS CAGR, as analysts expect the company to continue on its rapid growth path on the success of its GLP-1 medications for weight loss and diabetes treatment.
The high projected EPS CAGR for Incyte $(INCY)$ and Vertex Pharmaceuticals $(VRTX)$ reflect spikes in research and development costs (either in-house or for acquired in-process R&D projects) for those companies, ahead of planned product launches, pending FDA approval following trials.
High expected growth rates don't necessarily translate to positive sentiment among analysts working for brokerage firms or for other researchers who provide information to brokers. Leaving the first screened group in the same order, here is a summary of opinion among analysts polled by FactSet. We are only showing percentages of "buy" or equivalent ratings, because nearly all the other ratings are "hold," or neutral.
Company Ticker Share "buy" ratings Feb. 3 price Consensus price target Implied 12-month upside potential
Eli Lilly and Co. LLY 75% $810.43 $997.67 23%
Insulet Corp. PODD 77% $278.90 $297.52 7%
Intuitive Surgical Inc. ISRG 63% $578.55 $643.37 11%
DexCom Inc. DXCM 85% $87.05 $99.27 14%
Boston Scientific Corp. BSX 86% $103.07 $105.58 2%
UnitedHealth Group Inc. UNH 94% $548.18 $635.20 16%
Incyte Corp. INCY 45% $73.74 $78.14 6%
McKesson Corp. MCK 79% $599.82 $668.86 12%
Vertex Pharmaceuticals Inc. VRTX 61% $470.37 $501.21 7%
Bio-Techne Corp. TECH 72% $72.05 $85.58 19%
Source: FactSet
All of these stocks have majority "buy" ratings among the analysts, except for Incyte.
Analysts' favorite healthcare stocks
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February 04, 2025 09:08 ET (14:08 GMT)
MW 10 growth stocks in the S&P 500's bargain -2-
Let's sort the S&P 500 healthcare sector again to show the 10 stocks with the highest percentages of "buy" or equivalent ratings. Only five companies are on both this list and the above growth list:
IQVIA Holdings Inc. Ticker Share "buy" ratings Feb. 3 price Consensus price target Implied 12-month upside potential UnitedHealth Group Inc. UNH 94% $548.18 $635.20 16% Boston Scientific Corp. BSX 86% $103.07 $105.58 2% DexCom Inc. DXCM 85% $87.05 $99.27 14% Becton Dickinson and Co. BDX 85% $247.61 $272.85 10% Thermo Fisher Scientific Inc. TMO 84% $593.75 $669.08 13% IQVIA Holdings Inc IQV 82% $199.11 $246.32 24% Cigna Group CI 81% $292.46 $364.55 25% McKesson Corp. MKC 79% $599.82 $668.86 12% $Danaher Corp(DHR-W)$. DHR 79% $214.26 $267.57 25% Insulet Corp. PODD 77% $278.90 $297.52 7% Source: FactSet
From the first list of companies expected to increase sales most rapidly, UnitedHealth, Boston Scientific, DexCom, McKesson and Insulet are also on the "favorites" list.
So Becton Dickenson, Thermo Fisher, IQVIA, Cigna and Danaher are on the "favorites" list but not on the growth list.
Finally, here are growth projections and P/E ratios for the "favorites" group:
IQVIA Holdings Inc. Ticker Projected revenue CAGR through 2026 Projected EPS CAGR through 2026 Forward P/E
UnitedHealth Group Inc. UNH 10.3% 10.1% 18.2
Boston Scientific Corp. BSX 11.7% 14.0% 36.2
DexCom Inc. DXCM 14.9% 20.9% 42.1
Becton Dickinson and Co. BDX 6.3% 8.7% 16.7
Thermo Fisher Scientific Inc. TMO 4.6% 8.5% 25.2
IQVIA Holdings Inc IQV 5.1% 9.2% 16.5
Cigna Group CI 3.5% 10.7% 9.6
McKesson Corp. MCK 9.5% 13.0% 16.6
Danaher Corp. DHR 4.0% 7.2% 27.6
Insulet Corp. PODD 17.9% 24.2% 69.3
Source: FactSet
Click on the tickers for more about each company.
Read: Tomi Kilgore's guide to the wealth of information available for free on the MarketWatch quote page.
Don't miss: 20 value stocks primed for rapid revenue growth
-Philip van Doorn
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February 04, 2025 09:08 ET (14:08 GMT)
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