10 Best U.S. Growth Stocks to Buy for the Long Term

The stocks of these high-quality growth companies look undervalued today.

Margaret Giles 27 February, 2024 | 4:36AM
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Growth stocks had the upper hand in 2023: The Morningstar US Growth Index outperformed the Morningstar US Value Index by more than 26 full percentage points for the year. And that outperformance has continued so far in 2024 as growth is up around 4 percentage points over value for the year to date.

Can the growth stock rally last?

“Growth stocks as a category are now overvalued, and it has become increasingly difficult to find many undervalued opportunities left for investors,” observes Morningstar’s senior U.S. market strategist Dave Sekera. “However, there are still several stocks that continue to trade at a discount to our intrinsic valuations. As we forecast the rate of economic growth is poised to slow over the next few quarters, we prefer investing in higher-quality companies with wide economic moats.”

Our best growth stocks to buy for the long term share a few qualities:

  • They land in the growth portion of the Morningstar Style Box.
  • The stocks are from companies included on Morningstar’s list of the Best Companies to Own for 2024. Companies on this list have wide Morningstar Economic Moat Ratings and predictable cash flows, and they are run by management teams that make smart capital-allocation decisions.
  • They look reasonably priced, which means they’re trading below or near Morningstar’s fair value estimates.

 

10 Best Growth Stocks to Buy for the Long Term

The 10 most reasonably priced growth stocks from Morningstar’s Best Companies to Own list as of Feb. 15, 2024, were:

  1. Rentokil Initial RTO
  2. AstraZeneca AZN
  3. Tyler Technologies TYL
  4. Coloplast CLPBY
  5. Airbus EADSY
  6. Microsoft MSFT
  7. Cheniere Energy LNG
  8. Waters WAT
  9. Experian EXPGY
  10. Berkshire Hathaway BRK.B

Here’s a little bit about each of these growth stocks for the long term. Data is as of Feb. 15.

Rentokil Initial

  • Price/Fair Value: 0.74
  • Morningstar Uncertainty Rating: Medium
  • Morningstar Style Box: Mid-Growth
  • Morningstar Capital Allocation Rating: Exemplary
  • Industry: Specialty Business Services

Rentokil Initial, which tops our list of best growth stocks to buy this month, is the world’s largest commercial pest-control business, boasting leading market shares in the vast majority of the 87 countries in which it operates. This has been achieved in large part via vigorous tuck-in acquisition activity aimed at reaping the cost benefits, says Morningstar senior analyst Grant Slade. Rentokil’s balance sheet remains in decent shape, and we anticipate leverage to revert safely within its preferred range by the end of 2024, as Rentokil’s ambition is to retain an investment-grade credit rating. Rentokil Initial’s stock is 26% undervalued relative to our US$36 fair value estimate.

AstraZeneca

  • Price/Fair Value: 0.81
  • Morningstar Uncertainty Rating: Medium
  • Morningstar Style Box: Large Growth
  • Morningstar Capital Allocation Rating: Exemplary
  • Industry: Drug Manufacturers—General

The only drugmaker on our list of the best growth stocks to buy for the long term, AstraZeneca maintains one of the strongest pipelines in the drug group, and the company has several key products in development that hold blockbuster potential, argues Morningstar director Damien Conover. As high-margin specialty drugs continue to represent a larger proportion of sales, profit margins should expand over the next five years, too, he adds. AstraZeneca stock is trading 19% below our US$78 fair value estimate.

Tyler Technologies

  • Price/Fair Value: 0.91
  • Morningstar Uncertainty Rating: Medium
  • Morningstar Style Box: Mid-Growth
  • Morningstar Capital Allocation Rating: Standard
  • Industry: Software—Application

Tyler Technologies is the clear leader in the underserved niche market of government operational software, argues Morningstar senior analyst Dan Romanoff. We think there’s a decadelong runway to growth at Tyler, as the push for local governments to modernize their legacy enterprise resource planning systems intensifies. We see Tyler’s expanding portfolio as driving larger deals that encompass more solutions: It now has established enough of a reputation in the governmental market that it is called upon in most relevant government system searches. This mid-cap growth stock trades 9% below our US$485 fair value estimate.

Coloplast

  • Price/Fair Value: 0.92
  • Morningstar Uncertainty Rating: Medium
  • Morningstar Style Box: Large Growth
  • Morningstar Capital Allocation Rating: Exemplary
  • Industry: Medical Instruments and Supplies

Coloplast stock is 8% undervalued relative to our fair value estimate of US$14.10. Based in Denmark, Coloplast is a leader in global ostomy and continence care. The firm has a long record of consistent and meaningful innovation that has led to a dominant position in Europe. Share prices fell when Coloplast management reduced its fiscal 2024 outlook owing to a smaller expected operating margin, but Morningstar’s fair value estimate remains intact. Morningstar senior analyst Debbie Wang expects the firm’s operating margin to return to its historical benchmark of 30% in fiscal-year 2026.

Airbus

  • Price/Fair Value: 0.92
  • Morningstar Uncertainty Rating: Medium
  • Morningstar Style Box: Large Growth
  • Morningstar Capital Allocation Rating: Exemplary
  • Industry: Aerospace and Defense

Airbus, which is currently 8% undervalued relative to our fair value estimate, primarily generates revenue by manufacturing commercial aircraft. It benefits immensely from being in a duopoly with Boeing BA in the market for aircraft 130 seats and up; the companies act as a funnel through which practically all such commercial aircraft demand must flow, and we expect this duopoly to continue, says Morningstar analyst Nic Owens. Airbus is well-positioned to take advantage of increasing global commercial air travel. We think Airbus stock is worth US$44 per share.

Microsoft

  • Price/Fair Value: 0.97
  • Morningstar Uncertainty Rating: Medium
  • Morningstar Style Box: Large Growth
  • Morningstar Capital Allocation Rating: Exemplary
  • Industry: Software—Infrastructure

Microsoft is one of two public cloud providers that can deliver a wide variety of platform-as-a-service/infrastructure-as-a-service solutions at scale. Based on its investment in OpenAI, the company has also emerged as a leader in artificial intelligence, says Morningstar’s Romanoff. We believe that Azure is the centerpiece of the new Microsoft. Even though we estimate it is already an approximately $58 billion business, it grew at an impressive 30% rate in fiscal 2023. We believe Microsoft enjoys a position of excellent financial strength arising from its strong balance sheet, growing revenue, and high and expanding margins. Microsoft stock is currently 3% undervalued relative to our US$420 fair value estimate.

Read: After Earnings and a Big Rally, Is Microsoft Stock a Buy, Sell, or Fairly Valued?

Cheniere Energy

  • Price/Fair Value: 0.99
  • Morningstar Uncertainty Rating: Medium
  • Morningstar Style Box: Mid-Growth
  • Morningstar Capital Allocation Rating: Standard
  • Industry: Oil and Gas Midstream

Natural gas supplier Cheniere is well positioned to be the exporter of the incremental liquefied natural gas supplied to the global market over the next few years, particularly as demand ramps up from China, says Morningstar strategist Stephen Ellis. While the Biden administration recently announced that it has paused all new LNG project approvals, we think the delay effectively increases the value of Cheniere’s existing facilities, allowing it to take advantage of any near-term volatility in LNG prices. Under Cheniere’s new capital allocation plan, the firm has a larger commitment to the dividend with 10% annual increases through 2026. We think Cheniere Energy stock is worth US$161 per share.

Waters

  • Price/Fair Value: 1.00
  • Morningstar Uncertainty Rating: Medium
  • Morningstar Style Box: Mid-Growth
  • Morningstar Capital Allocation Rating: Exemplary
  • Industry: Diagnostics and Research

Diagnostics and research company Waters turned in a solid end to what wound up being a very challenging year for most life science companies. The company’s 2024 guidance looks weaker than we were anticipating, but we remain confident in its long-term prospects, says senior equity analyst Julie Utterback. Waters expects only 0% to 2% revenue growth in 2024 as continued challenges in China are expected to hamper growth. We still think Waters can return to low-double-digit earnings growth eventually based on the firm’s strong long-term growth opportunities in its analytical end markets. Waters shares are trading around our US$323 fair value estimate.

Experian

  • Price/Fair Value: 1.01
  • Morningstar Uncertainty Rating: Medium
  • Morningstar Style Box: Large Growth
  • Morningstar Capital Allocation Rating: Standard
  • Industry: Consulting Services

One of the leading consumer credit bureaus in the United States, Experian faces headwinds from a weakening macroeconomic backdrop and tighter lending. This large-growth company continues to focus on geographic diversification and pursuing both organic and inorganic opportunities. We expect revenue growth in the mid- to high-single-digit range and meaningful margin expansion over the next five years, says Morningstar analyst Rajiv Bhatia. Experian stock is trading near our US$42 fair value estimate.

Berkshire Hathaway

  • Price/Fair Value: 1.01
  • Morningstar Uncertainty Rating: Low
  • Morningstar Style Box: Large Growth
  • Morningstar Capital Allocation Rating: Exemplary
  • Industry: Insurance—Diversified

Berkshire Hathaway rounds out our list of best growth companies to buy for the long term. We view Berkshire’s decentralized business model, broad business diversification, high cash-generation capabilities, and unmatched balance sheet strength as true differentiators for the firm, says Morningstar strategist Greggory Warren. While Berkshire Hathaway has had large cash balances over the past decade, which earned next to nothing in a near-zero short-term interest-rate environment, we believe the company is now focused on reducing its cash hoard through a mixture of stock investments and share repurchases. We don’t believe the death of Charlie Munger and the eventual departure of Warren Buffett will affect the company, as Berkshire has laid the groundwork for a successful transition in leadership. Berkshire Hathaway’s B shares trade around our fair value estimate of US$400.

What Are the Morningstar Style Box and Fair Value Estimate?

The Morningstar Style Box is a nine-square grid that provides a graphical representation of the investment style of stocks, bonds, or funds. Based on a series of inputs—including a company’s historical and long-term projected growth and its historical and forward-looking price multiples—a stock is classified as either a value stock, a growth stock, or a core stock. A stock is also classified as either small-cap, mid-cap, or large-cap based on its market capitalization.

The fair value estimate, meanwhile, represents what Morningstar analysts think a particular stock is worth. Fair value estimates are rooted in fundamentals and based on how much cash we think a company can generate in the future, not on fleeting metrics such as recent earnings or current stock price momentum.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Airbus SE ADR42.52 USD0.00Rating
AstraZeneca PLC ADR68.55 USD0.28Rating
Coloplast A/S ADR12.97 USD0.78Rating
Rentokil Initial PLC ADR26.45 USD3.28Rating
Tyler Technologies Inc403.35 USD0.10Rating

About Author

Margaret Giles  Margaret Giles is a journalist for Morningstar.com, based in Chicago

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