after a brutal first half of the year highgrowth technology and consumer cyclical stocks are back leading the market however there are still highquality growth names such as mercadolibre meli and salesforce crm trading at steep discounts growth stocks are up 180 since the bear market low point on june 16 as measured by the morningstar us growth index 6 percentage points ahead of the broader us market but these stocks are still down 223 for the year through august 10 that puts the growth index on track for its worst year since 2008 that has left swaths of growth companies trading below their fair value estimates from morningstar’s stock analysts growth stocks generally have higher readings on earnings and sales ratios than their value counterparts as well as lower dividend yields the valuations for growth stocks are largely based on expectations of their future earnings so they are more affected by moves in interest rates than other areas of the market that’s part of the reason why growth stocks underperformed so much at the start of the year dragging names like salesforce down 258 and teradyne ter which has tumbled 393 as of august 10 both stocks are undervalued according to morningstar analysts salesforce by 38 and teradyne by 41 to compile a list of the highestquality undervalued growth stocks we screened the morningstar us wide moat focus index a group of companies with durable competitive advantages that are also trading at the lowest prices relative to their analystassessed fair value estimates in addition to searching for undervalued names the screen looked for stocks that have the highest morningstar growthvalue scores in other words the “growthiest” undervalued stocks in the index growth scores are based on longterm projected earnings growth of the companies as well as the growth of their book values sales cash flow and historical earnings growth companies score lower on pricebook pricesales and pricecash flow ratios and they tend to have lower dividend yields compared with value companies “while we expect mercadolibre’s platform monetization to increase only gradually we anticipate that swelling customer expectations around sub48hour shipping times increased fulfillment penetration and small merchant credit tied to platform sales should render mercadolibres services increasingly sticky” “servicenow will continue to use its position to land new itdriven customers and upsell itom features on the platform but we believe the company will increasingly crosssell emerging products in hr and customer service along with the platform as a service paas offering in our view product strength market presence and a strong sales push into areas outside of it will continue to drive robust growth” “from a retail perspective we expect continued innovation to help drive further share gains we also look for amazon’s continued penetration into categories such as groceries and luxury goods which have not previously translated into the same level of success as other retail categories we see technology advancements in aws and a bigger push to service enterprise customers as helping to maintain the company’s lead there overall we expect strong revenue and free cash flow growth for years to come” “effective technology and dominant position enable veeva to generate excess returns commensurate with a widemoat company its strong retention continued development of new applications increasing penetration with existing customers addition of new customers and expansion into industries outside of life sciences should allow the company to extend its market leadership in our view” “we believe salesforcecom represents one of best longterm growth stories in software even as revenue growth is likely to dip below 20 for the first time at some point in the next several years we believe ongoing margin expansion should continue to compound earnings growth of more than 20 annually for much longer” “in our view there is no morecomprehensive marketing platform this approach makes sense to us in that adobe is leveraging its already strong position within the creative professional market we believe switching costs drive a narrow moat for adobes digital experience segment while we believe in the strong and comprehensive solutions under this umbrella we note adobe did not create the markets involved does not have a firstmover advantage and does not enjoy any quasimonopoly status with products here” “office 365 retains its virtual monopoly in office productivity software which we do not expect to change in the foreseeable future we believe that microsoft’s customers will continue to drive the transition from onpremises to cloud solutions and revenue growth will remain robust with margins continuing to improve for the next several years”