Growth stocks, which took a back seat to their value counterparts from January through May of this year, have been bouncing back in the past month. For example, the S&P SPDR 500 Growth ETF (NYSEARCA:SPYG) is up 5% in the past month, compared to a 3% loss for the S&P SPDR 500 Value ETF (NYSEARCA:SPYV).
I believe the main driver of this performance is less concern over inflation and lower treasury yields.
Treasury yields had been rising over the past couple of months due to concerns over inflation. Inflation is considered a negative to growth stocks as it discounts a growth stock’s present value. But investors have since changed their tune and now view inflation as transitory. This has led to lower treasury yields and higher stock prices for growth stocks.
While the Fed just announced plans to raise rates in 2023, there’s still plenty of time to generate strong returns in growth stocks if you know where to look.
I like to focus on four components of our proprietary POWR Ratings system when looking for top growth stocks. I want a stock with a “Strong Buy” rating that also has a grade of A for Growth, Value and Momentum. I call these the four aces. These are highly rated stocks based on 118 different factors and exhibit strong growth characteristics. Plus, they’re undervalued and trading in an uptrend, making it the perfect time to buy.
Foot Locker (NYSE:FL) and Signet Jewelers (NYSE:SIG) certainly fit the bill.
Growth Stocks: Foot Locker (FL)
FL is one company that has been on a tear over the past year. The stock is up over 100% since Aug. 18. The company sells athletically inspired shoes and apparel. It operates thousands of retail stores throughout the United States, Canada, Europe, Australia, and New Zealand. Store names include Foot Locker, Champs, and Runners Point. FL also has an e-commerce business where it sells merchandise through Footlocker.com, Eastbay, and Final-Score.
The company has been investing in expanding its digital presence by growing its e-commerce platform and direct-to-consumer operations. For instance, it activated a Shop My Store feature on its website and added Apple Pay and Google Pay as digital payment options. This has paid off in the first quarter, as its direct-to-consumer segment generated over 40% in sales growth.
FL is also aiming to grow through its kids’ and women’s businesses and grow internationally. For example, the company has seen strong growth in the Asia Pacific region. FL has an overall grade of A, which translates into a “Strong Buy” rating in our POWR Ratings system. In addition, the company has a Growth Grade of A, driven by earnings and EBITDA growth of over 100% in the past year.
Earnings are forecasted to rise 40.8% in the current quarter. FL also has a Momentum Grade of A due to its performance in the last year. The company also has a Value Grade of A, which isn’t surprising, as it has a trailing P/E of 10.32 and a forward P/E of 12.4. The stock has pulled back a little over the past week, making it an excellent opportunity to buy on the dip.
We also provide Stability, Sentiment, and Quality Grades for FL, which you can find here. In addition, FL is ranked No. 1 in the A-rated Athletics & Recreation industry. For more top stocks in this industry, click here.
Growth Stocks: Signet Jewelers (SIG)
Much like FL, SIG has seen huge share gains over the past year. The company is a retailer of diamond jewelry. Its merchandise mix includes bridal, fashion, watches and others. The bridal category includes engagement, wedding and anniversary purchases. Its North America segment consists of the legacy Sterling Jewelers and Zale units. U.S. stores operate nationally in malls and off-mall locations like Kay, Jared, Zales, and Piercing Pagoda.
The company has benefited from government stimulus, tax refunds, and consumer enthusiasm driven by the vaccine. SIG has also been expanding its online shopping experience as part of its Signet Path to Brilliance Plan. For instance, in the first quarter, e-commerce sales soared 110% year over year. The company has introduced tools like conversational messaging, improved text search, and virtual try-on. It also added new search browse and checkout features.
SIG also bought Rocksbox, a jewelry rental subscription service, which is expected to expedite the company’s online offerings. To drive future growth, management will be utilizing data-driven insights to target new and existing customers. The company has also been optimizing its store footprint. It has shuttered more than a fifth of its locations over the past three years while opening and repositioning stores in more profitable locations.
SIG has an overall grade of A, translating into a “Strong Buy” rating in our POWR Ratings system. Like FL, the company has a Growth Grade of A, a Value Grade of A, and a Momentum Grade of A. In terms of growth, SIG’s EBITDA surged 1,294.8% over the past year. Plus, analysts expect earnings to soar 243% this quarter. From a valuation standpoint, the stock is also relatively undervalued with a forward P/E of 14.7.
To access the rest of SIG’s grades (Stability, Sentiment, and Quality), click here. In addition, SIG is ranked No. 4 in the A-rated Fashion & Luxury industry. For other top stocks in this industry, click here.
On the date of publication, David Cohne did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
David Cohne has 20 years of experience as an investment analyst and writer. Prior to StockNews, David spent eleven years as a Consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers.
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