2 Cheap Growth Stocks to Buy During 2Q

Susan Dziubinski: I’m Susan Dziubinski with Morningstar. Growth stocks continue to look more expensive than value stocks. Growth stocks as a group were 7% overvalued at the end of the first quarter of 2024, according to Morningstar’s metrics, while value stocks were 6% undervalued.

But those numbers are simply averages—not every growth stock looks overpriced. Today, we’re looking at two stocks that land on the growth side of the Morningstar Style Box that look undervalued to us. Both of these stocks are also among our analysts’ top picks for the second quarter.

The first undervalued growth stock our analysts like is Adobe ADBE. Adobe lays claim to what have become the leading software tools for creative professionals, including Photoshop, Illustrator, and InDesign. Thanks in part to these industry-leading tools, Morningstar assigns Adobe a wide economic moat rating, which means we think the company will remain competitive for 20 years or more. The stock has stumbled this year, but we see plenty of momentum within product innovation, client interest, and revenue creation over the long term. Plus, Adobe’s margins are near the top of the software industry. We think shares are worth $610 each.

The second undervalued growth stock our analysts like this quarter is Illumina ILMN. Illumina is a leader in genomic sequencing and related applications. We think the company has carved out a narrow economic moat around its genetic analysis tools and services, suggesting that Illumina will remain competitive for a decade or longer. The company plans to divest its Grail assets in late 2024. Our current fair value estimate on Illumina of $228 per share includes a $180 per share value on the company’s legacy sequencing business and about $48 on Grail. Although we’re expecting weak near-term results based on our short-term macro outlook for life sciences, we expect a big rebound in both revenue and profits eventually for the legacy business, considering the sequencing market’s strong prospects, Illumina’s own new product launches, and a return to more-normalized profit margins.

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Morningstar senior analysts Dan Romanoff and Julie Utterback provided the research behind this segment.