Top growth stock with promising EPS forecasts

These tough results resulted in the company increasing its revenue by 101% annually in Q2FY24, Q3FY24, Q4FY24, Q1FY25 and Q2FY25, 206%, 265%, 262% and 122% increased. The sales growth was accompanied by a triple-digit increase in profits in all quarters. The highest figure was for the second quarter of fiscal 2024, when non-GAAP net income increased 843% year-over-year.

So it's safe to say that growth is rewarded by the stock market. However, investors' high expectations of growth stocks also mean that they are punished more harshly if they fail to meet expectations. Research from the University of Michigan analyzed 13 years of data that included consensus earnings forecasts, quarterly earnings, stock prices, market-to-book ratios and price-to-earnings ratios to examine whether growth and value stocks perform similarly when they fail to meet earnings expectations .

Their results show that growth stocks tend to fall more than value stocks when there are negative earnings surprises. The researchers add that the underperformance typically occurs before earnings announcements because growth stocks tend to pre-announce their negative earnings surprise. A descriptive analysis of their data also shows that cumulative stock returns for the days between two earnings cycles are higher for low-growth stocks than for high-growth stocks. For the lowest growth stocks, the cumulative returns of all companies analyzed were 0.66%, while the returns for companies with negative and positive earnings surprises were -3.57% and 5.44%, respectively. Among high-growth stocks, the cumulative returns of all companies were -0.58%, and the returns of those with negative and positive earnings surprises were -7.32% and 6.32%, respectively.

The study succinctly summarizes the potential of investing in growth stocks and the associated risks. Back to our GPU designer: While he is currently at the center of the AI ​​trend, he was at the center of the Bitcoin rush in 2017 and 2018, as gaming GPUs could also be used to mine cryptocurrencies. However, the price of Bitcoin fell by 83% between mid-December 2017 and mid-December 2018. For the company's quarter ended January 2019, this resulted in gaming GPU sales declining 45% year-over-year and 46% sequentially. This was because the crypto sector had over-ordered GPUs, but when Bitcoin prices fell, mining became unprofitable and over-ordering led to market flooding. Looking at the company's share price post-split, this caused the stock to fall 53% between October and the end of December 2018.

Our methodology

To create our list of BofA's top growth stocks, we used the bank's current list of stocks that are rated Buy, have an EPS Surprise rating, and have the highest forecast growth rates over the next five years. Stocks were ranked based on their forecast EPS growth rates.

For these stocks, we have also mentioned the number of hedge fund investors. Why do we care about the stocks hedge funds invest in? The reason is simple: Our research shows that we can outperform the market by mimicking the top stock picks of the best hedge funds. Our quarterly newsletter strategy selects 14 small-cap and large-cap stocks each quarter and has returned 275% since May 2014, outperforming the benchmark by 150 percentage points. (More details can be found here).

A set of pharmaceutical pills with the company logo on the bottle.

Number of hedge fund owners in Q2 2024: 100

Projected EPS Growth Rate: 50.6%

Eli Lilly and Company (NYSE:LLY) is a mega-pharmaceutical company that sells drugs for diabetes, obesity and cancer. This gives the company exposure to some of the hottest markets in the pharmaceutical industry, and its success in the obesity market has also translated into a tailwind for its share price. LLY shares are up 53% year-to-date. However, with weight loss drugs now a central part of the hypothesis, any threat from competitors means stocks will be hit hard. This was the case between mid-July and early August, when LLY shares plunged 19% as investors reacted to favorable developments in weight-loss drugs from Roche and Viking Therapeutics. To ensure the company remains a leading player in the market, Eli Lilly and Company (NYSE:LLY) is currently working on orforglipron, which is cheaper and easier to manufacture than current treatments. This is particularly important because generic weight loss drugs can further dilute the market.

Baron Funds mentioned Eli Lilly and Company (NYSE:LLY) in its Q2 2024 investor letter. Here's what the fund said:

“In biopharmaceuticals, we remain optimistic about the market opportunities for new diabetes and obesity medicines. In June, principal investigators of the SURMOUNT-OSA trial presented full data proving this at a medical meeting Eli Lilly and companyTirzepatide reduced obstructive sleep apnea in adults with obesity by up to 62.8%, and up to 51.5% of participants met criteria for disease resolution. This impressive data set paves the way for the use of tirzepatide to treat obstructive sleep apnea in overweight and obese individuals.”

Overall, LLY takes 4th place on our list of BofA's top growth stocks with the fastest projected EPS growth rates. According to BofA, LLY is one of the top stocks with the highest earnings growth. While we recognize LLY's potential as an investment, we believe some AI stocks have greater prospects of delivering higher returns, and within a shorter time frame. If you're looking for an AI stock that has more promise than LLY but trades at less than 5 times earnings, check out our report on it cheapest AI stock.

READ MORE: $30 Trillion Opportunity: The 15 Best Humanoid Robot Stocks to Buy, According to Morgan Stanley And Jim Cramer says NVIDIA has “become a wasteland”.

Disclosure: None. This article was originally published at Insider monkey.