A top portfolio manager explains why growth stocks will thrive in 2024 — and names 6 companies that are set to outperform
- Stocks are on a roll that can continue as the US avoids a recession, a top fund manager believes.
- She thinks the Federal Reserve will stop raising interest rates since inflation is on the decline.
- Here are six top stocks to buy and hold in 2024.
Kimberly Scott, a leading fund manager, believes that a recession will not derail the market’s momentum.
US stocks exploded in late October, and they have now nearly recovered from a three-month selloff that began in August. The November resurgence has been fueled by economic optimism and falling inflation, which fell faster than expected last month.
Investors applauded this week’s softer inflation report because it likely means the Federal Reserve will stop raising interest rates. Fewer rate hikes could avert a recession while also boosting Scott’s Delaware Ivy Mid Cap Income Opportunities Fund (IVOAX) as it recovers from a difficult year.
According to Morningstar, Scott’s mid-sized stock fund is having its best year of relative performance since 2018, with a top-16% showing in its category. Despite beating its benchmark index, it is still only up 8.1% this year after being crushed during the market correction.
Mid caps fell out of favor as stocks fell, but Scott told Insider that she and co-managers Nathan Brown and Bradley Halverson remained firm in their beliefs. In comparison to the market’s biggest headwinds, which are proving to be temporary, their investing strategy is time-tested.
“It’s just pretty astounding how much concern and impact has happened in just about three months,” Scott said in a recent interview with Insider. “And when you see impacts that significant, that quickly — it’s not always completely sustainable.” So we keep doing what we’ve always done, but these have been the challenges.”
Companies are overly worried heading into 2024
Although making economic predictions is not Scott’s primary focus, she closely monitors indicators and data that influence the performance of her fund.
For example, the long-term investor stated that she closely followed corporate commentary during the third quarter earnings season. Many businesses are concerned, she said, including those impacted by slowing industrial activity and spending. Consumer-focused businesses are becoming more cautious as savings balances dwindle and student loan payments become due, causing a reduction in spending.
“The consumer companies are definitely acting like a recession is approaching,” he said. “Their spending on technology, their control over inventories would be indicative of concern about a recession.”
However, earnings have performed much better than expected this year, raising the possibility that companies are setting an artificially low bar in order to impress Wall Street when they eventually clear it.
“The fundamentals really aren’t that bad,” Scott explained. “They’ve just not been as strong as investors would have anticipated at this point in the cycle.”
Nonetheless, Scott believes the US economy will continue to grow in 2024 as earnings growth accelerates once more. Lower inflation may soon change the Fed’s “higher for longer” interest rate rhetoric, which has dampened growth expectations and stock valuations.
Scott believes that if price growth slows to normal levels, growth-oriented stocks will outperform in 2024.
“If rates are going to be more charitable to investors next year, I think the impact will be somewhat more helpful to growth stocks, simply because they tend to have multiples that get questioned when rates start to move higher,” he said.
“Many of these companies are beginning to trade at multiples that are actually quite attractive,” Scott added later. Their balance sheets are improving, and working capital is being reduced to increase free cash flow, which I believe reduces the risk of investing in mid- and small-cap stocks.”
6 top stocks to own in 2024
After sharing her optimistic view about earnings and the economy, Scott listed six stocks she’s bullish on heading into 2024. Each name is below, along with its ticker, market capitalization, sector, and thesis from Scott.
1. Pinterest
Ticker: PINS
Market cap: $21.7B
Sector: Communication Services
Thesis: Pinterest surged in late October after exceeding third-quarter earnings and revenue expectations. Scott said she is still optimistic about the company’s direction under CEO Bill Ready, particularly its international expansion and advancements in advertising technology.”Not only are they seeing good monthly-average-user growth, but they’re seeing greater monetization of the ad opportunities within their platform in the here and now, and they continue to enhance that,” Scott went on to say. “And I think the fact that they’re getting some traction in a time when the advertising demand is at a cyclically weak point bodes well for what we’ll see as they move into a greater ad demand environment as the economy begins to heal over the next quarter.”
2. Tyler Technologies
Ticker: TYL
Market cap: $17.7B
Sector: Technology
Thesis: This software company based in Plano, Texas, assists local and state governments in becoming more efficient by digitizing outdated systems and processes. Scott praised the company for generating bankable revenue by shifting away from perpetual licenses and toward subscriptions.
“It helps the client, but it also helps Tyler because it’s a much more efficient way of managing this,” Scott went on to say. “As a result, they’re getting higher margins around this.” With payment technology, they are increasing their profit margins. And governments are flush with cash from the economy’s strength in recent years, as well as stimulus money, and they’re spending it on digitizing their operations.”
Scott went on to say, “It’s a great company that really grows smartly and profitably, and it represents what we do in our strategy very well.”
3. CoStar Group
Ticker: CSGP
Market cap: $33.8B
Sector: Real Estate
Thesis: CoStar is a real estate giant that runs well-known platforms like LoopNet, Homes.com, and Apartments.com. Scott has liked the company for a while but sees new catalysts for it heading into 2024, particularly for renewed growth as the industry gets shaken up following commission lawsuits against the National Association of Realtors.
“It’s a wonderful business that they put together,” Scott said. “Now they’re applying this technology to the residential real estate business, but really doing it in a much different way than you’ve seen any software offering to market residential real estate.”
Scott continued: “Everybody thinks about Zillow, but Zillow tends to focus on the agents that are not necessarily the listing agent. And CoStar’s coming at it from a very different way and engaging with the listing agent in order to market the property directly.”
4. Pool Corporation
Ticker: POOL
Market cap: $13.5B
Sector: Industrials
Thesis: Pool shares made a splash during the pandemic as the stay-at-home trend took off. People built new pools or refurbished old ones, which also drove sales for pool supplies and gadgets like pumps and heaters, Scott said.
While the stock is well off its late-2021 peak following a drop in demand, Scott said the firm will continue to benefit from pool maintenance and repair, which makes up the bulk of its sales.
“If you have a pool, you have to take care of it — otherwise, it becomes a swamp,” Scott said. “It’s a non-discretionary item for pool owners, and the installed base of pools has gone up significantly over the past three years.”
