10 'better values' in the stock market, selected for the next two years

By Philip van Doorn

William Blair's list of favored stocks for the next 24 months includes Five Below, Chewy and Allstate

Since market valuations are always changing, along with outlooks for corporate revenue and earnings, any list of favored stocks is only a snapshot. Repeating the same analysis in the near term might lead to an entirely different list of compelling names. This is why analysts at William Blair publish a list of "Current Better Values" in the stock market every two months.

The list tends to include 10 to 15 stocks of companies of various sizes that are selected by William Blair's analysts, with 24-month investment horizons. The group is narrowed down by John Kreger, the firm's director of research. The firm cautions that the lists "do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations" for investors.

So the idea is to think longer term than the usual 12-month price targets used by Wall Street analysts. In its latest report, published on Tuesday, William Blair compared average total returns for equally weighted portfolios of stocks for each Current Better Values list for the following 24 months, going back to the first list in July 1976.

On that basis, the average 24-month total returns of the Better Values portfolios was 31.9%, compared with average returns of 18.4% for the Dow Jones Industrial Average DJIA and 19.4% for the S&P 500 SPX. For a comparison of performance to small-cap stocks, which William Blair defines as those with market values of $5 billion or less, the firm looked at the Russell 2000 index RUT, which was established in January 1979. For that period, the Russell 2000's average 24-month return from Better Values portfolio pricing dates was 19.3%.

Another note of caution from William Blair: "The performance summary should not be used in making an investment decision with regard to any specific security or any specific Current Better Values List."

With all that out of the way, here is William Blair's latest list of Current Better Values, sorted by market capitalization.

   Company                       Ticker Industry                             Market cap. ($mil)  2023 return  2022 return  Return since the end of 2021 
   Fiserv Inc.                     FI   Business Services                               $99,319          24%          -3%                           21% 
   Allstate Corp.                 ALL   Property/ Casualty Insurance                    $43,386          -1%          18%                           18% 
   Hologic Inc.                   HOLX  Medical Specialties                             $18,014          -4%          -2%                           -6% 
   Dynatrace Inc.                  DT   Software                                        $14,550          33%         -37%                          -16% 
   Align Technology Inc.          ALGN  Medical Specialties                             $14,597          -3%         -68%                          -69% 
   Five Below Inc.                FIVE  Discount Stores                                 $11,441           4%         -15%                          -11% 
   Chewy Inc. Class A             CHWY  Internet Retail                                  $8,731         -43%         -37%                          -64% 
   DoubleVerify Holdings Inc.      DV   Software                                         $5,308          43%         -34%                           -5% 
   Novanta Inc.                   NOVT  Electronic Equipment/ Instruments                $5,485           5%         -23%                          -19% 
   Fusion Pharmaceuticals Inc.    FUSN  Pharmaceuticals                                    $149          33%         -24%                            0% 
                                                                                                                                        Source: FactSet 

All 10 stocks are rated outperform by William Blair's analysts.

This list is not a traditional set of value stocks that investors would expect to be trading at low price-to-earnings ratios. The William Blair analysts see value for these companies for a variety of reasons:

Fiserv Inc. FI provides core financial processing for a variety of customers, including banks. In the Current Better Values report, Christopher Kennedy cited the company's long history of navigating economic cycles and "a set of over 1,000 products/services that are heavily ingrained into the existing global financial infrastructure," along with the market's underappreciation for "various initiatives to address growing trends such as embedded finance, B2B payments, and digital transformation."According to Adam Klauber, Allstate Corp. ALL is "turning a corner" in its car-insurance business, for which he expects "a more normalized combined ratio of 95%" in 2024. A property and casualty insurer's combined ratio is the sum of its incurred losses and expenses divided by its earned insurance premiums. Lower is better. A combined ratio below 100% shows that an insurance underwriting segment is profitable. The company reported that its underlying combined ratio (a non-GAAP measure that nets out the effects of catastrophes and amortization of purchased intangible assets) for its car business was 101.2% for the first three quarters of 2023. Hologic Inc. HOLX provides medical products and systems, with a focus on women's health. In the report, Andrew Brackmann wrote: "Following the pandemic, the company continues to differentiate itself as a business with materially improved prospects, and we believe it is set up well to deliver at least 5% to 7% top-line growth with expanding margins over the next several years." Below, you can see that Brackman's revenue-growth expectations for the company are far ahead of the consensus among analysts polled by FactSet.Dynatrace Inc. DT develops security software, including the artificial-intelligence-enabled Davis, which monitors corporate and cloud systems. Jake Roberge believes the company "has built a nice competitive moat" for systems monitoring and for it to continue a high pace of revenue growth. Among analysts polled by FactSet, Dynatrace has the second-highest expected sales-growth rate over the next two years among these 10 companies, as you can see below.Align Technology Inc. ALGN makes devices used by orthodontists to realign teeth. In the report, Brandon Vazquez said economic weakness was the biggest threat to Align's share price, but he also cited "bright spots," including "strong teen case volumes that are taking market share," a new subscription program for care providers, new products and improving profit margins. Five Below Inc. FIVE is a discount retailer you are probably familiar with. Phillip Blee considers this to be "a defensive growth name," whose financial strength and historical stability "should support strong comp sales growth and margin improvements despite the uncertain macro backdrop."Chewy Inc. CHWY went public at an initial public offering price of $22 in June 2019. The stock performed well through 2020 but has had a more difficult run since then, closing at $21.13 on Wednesday. With its dominant market share for online retail of pet-related products, Chewy should benefit from a "steady" movement of demand from traditional big-box retailers, Dylan Carden said.Double Verify Holdings Inc. DV provides systems to analyze digital advertising. "Integrations with social platforms and other ad networks keep barriers to entry high, as it would be difficult for new entrants to match the breadth of integrations, especially considering the digital ad market is a continuously evolving industry," Arjun Bhatia wrote in the report. He expects new partnerships with Meta Platforms Inc. META, Netflix Inc. NFLX, TikTok and other companies to drive growth for Double Verify over the next few years.Novanta Inc. NOVT provides phonic, vision and motion components and subsystems for use by manufacturers of medical devices and for other markets. Brian Drab wrote in the report: "On average, management expects 5% to 7% organic revenue growth and 100 basis points of gross margin expansion annually, which we forecast will translate to consistent midteens EPS growth."The last and smallest company on the list is Fusion Pharmaceuticals Inc. FUSN, which is in the midst of Phase II trials for treatment for prostate cancer. An early stage biotech company with no revenue is a risky, binary play on the success of the trials. Andy Hsieh likes this stock because of the company's "deep knowledge and expertise in radiopharmaceuticals," and in the report he hinted at the possibility the company could be acquired, citing the acquisition of Point Biopharma Global Inc. PNT by Eli Lilly & Co. LLY.

Expectations for sales growth

Some companies have fiscal years that don't match the calendar. So the following consensus estimates among analysts polled by FactSet are for calendar years through 2025.

No consensus sales or earnings estimates are available for Fusion Pharmaceuticals, so here are expected compound annual growth rates for revenue through 2025 for the first nine stocks on the list. Sales estimates are in millions of dollars:

   Company                      Ticker   Two-year estimated sales CAGR through 2025  Estimated 2023 sales  Estimated 2024 sales  Estimated 2025 sales 
   Fiserv Inc.                    FI                                           7.5%               $18,090               $19,488               $20,912 
   Allstate Corp.                ALL                                           8.4%               $49,837               $54,538               $58,521 
   Hologic Inc.                  HOLX                                          3.3%                $4,019                $4,055                $4,289 
   Dynatrace Inc.                 DT                                          19.6%                $1,349                $1,619                $1,928 

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