We recently compiled a list of the 10 Worst-Performing Growth Stocks in 2024. In this article, we are going to take a look at where EPAM Systems, Inc. (NYSE:EPAM) stands against the other Worst-Performing Growth Stock in 2024.
Economic Growth and Market Resilience
Economists anticipate modest US economic growth in the upcoming quarters, and some continue to caution that a mild recession could occur. If high interest rates have a lagging negative effect on American consumers, it might be challenging for investors to locate reliable growth stocks to purchase.
Nevertheless, analysts at UBS are confident that the upward trajectory in the equity market is poised to continue amid the uncertainties regarding the US election and soaring geopolitical tensions in the Middle East. The strategists led by Jonathan Golub have already raised their S&P 500 target to 6,400 from 6000 on the belief that the US economy will remain resilient and supportive of the equity markets.
READ ALSO: 10 Most Promising Future Stocks According to Analysts and 10 Most Promising Growth Stocks According to Hedge Funds.
The Swiss bank expects the interest rate cuts by the Fed to be supportive of the economy, therefore fueling a 3.7% nominal growth in 2025. Likewise, the rate cuts should lower interest expense on borrowed capital and, in return, the default risk, which should add to earnings per share and valuations
“Valuations typically expand when the Fed cuts in non-recessionary environments,” the strategist said on October 15 in an interview with CNBC. “Despite elevated valuations, we expect P/Es to rise [half a] multiple point.” Golub also noted that a “sharp decline in Fed Funds will likely increase profit margins by 20 [basis points] via lower interest expense.”
Growth Stocks and Investment Strategies
Since the start of 2023, growth stocks have beaten value stocks, and investors expect this trend to continue as the Fed eases monetary policy to steer the economy into a soft landing. Over the past few years, the bull market has affected stocks in various industries differently. Some have rallied, generating significant returns, while others have lagged their core business and earnings, having come under pressure.
The best growth stocks can beat the stock market and give investors sizable returns regardless of the prevailing economic conditions. That has been the case as some have posted robust revenue growth higher than that of most of their peers, and the catalysts indicate that the growth may continue.
Some of the growth stocks that have exploded in value have received a lift from the economy, remaining resilient, while others have benefited from the artificial intelligence frenzy. Even as investors eye opportunities around AI plays, Morning Star’s chief market strategist Dave Sekera, believes it might be time to reconsider that investment strategy.
“In our 3Q 2024 Stock Market Outlook, we reviewed why we thought the AI trade had run its course and investors should pare down positions in growth stocks and reinvest those proceeds into value stocks. As detailed in our August 2024 Outlook, it appears that the great rotation into value stocks began in July—and still has further room to run. According to our valuations, on both an absolute as well as a relative basis, value stocks remain the most attractive category by style,” said Sekera.
Nevertheless, some growth stocks have fallen behind after a few successful years. The stocks are down year to date, having felt the full brunt of high interest rates and inflation. Some have underperformed as investors question their long-term prospects due to soaring competition in their respective sectors. While other growth stocks’ core business has come under pressure amid the proliferation of advanced technology that is eating into their respective core fields
To determine which stocks are the best to purchase right now, investors must distinguish between these assets. In addition to providing a solid foundation, this list of growth stocks may enable you to outperform the market.
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Our Methodology
To compile our list of the worst-performing growth stocks in 2024, we started by gathering stocks from various growth stock ETFs. We filtered these stocks based on their share price drops, creating a list of twenty companies. Finally, we ranked these companies in ascending order according to their share price drops year to date.
At Insider Monkey, we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
EPAM Systems, Inc. (NYSE:EPAM)
Year to Date Gain as of October 28: -34.24%
Number of Hedge Fund Holders: 37
EPAM Systems, Inc. (NYSE:EPAM) is a technology company that provides digital platform engineering and software services used by high-tech businesses. The company has been under pressure due to the stock sliding 34.24% for the year.
The selloff, which has affirmed EPAM Systems, Inc. (NYSE:EPAM)’s status as one of the worst-performing growth stocks in 2024, comes on the virtue of the company experiencing reduced sales across its end markets. A slowdown in IT spending has also affected the company’s ability to ramp up sales of its critical software solutions.
Because of its unique digital engineering capabilities, EPAM Systems, Inc. (NYSE:EPAM) saw tremendous growth during the post-pandemic wave of digital transformation. However, due to the geopolitical turmoil brought on by Russia’s invasion of Ukraine, the company encountered significant operational difficulties in fiscal years 2022 and 2023.
Consequently, the global digital platform engineering and software development services provider delivered mixed second-quarter results. Revenue in the quarter was down 2% year over year to $1.15 billion as earnings per share fell 7.2% to $2.45. Even though EPAM Systems, Inc. (NYSE:EPAM) is still very focused on GenAI and cloud technologies, its growth has been hampered by its strategic withdrawal from Russia, resulting in a 0.5% decline in revenue year over year.
EPAM Systems, Inc. (NYSE:EPAM) remains committed to expanding in the high-demand technology sectors of GenAI and cloud services as it continues to explore new growth opportunities. Nevertheless, disruptions in AI automation pose significant risks to traditional job roles, which are expected to affect some of the company’s vital revenue streams.
According to Insider Monkey’s database, 37 hedge fund portfolios held EPAM Systems, Inc. (NYSE:EPAM) at the end of the second quarter, down from 43 in the previous quarter.
Here is what White Falcon Capital Management said about EPAM Systems, Inc. (NYSE:EPAM) in its Q2 2024 investor letter:
“This was a difficult quarter. The negative performance of Endava, EPAM Systems, Inc. (NYSE:EPAM) and Converge could not be offset by strength in Amazon.com, Nu Holdings and precious metal royalty companies. The portfolio was affected by middling earnings and guidance downgrades from our IT services and software positions as corporates prioritize Artificial Intelligence (AI) related IT spending. The market itself had an excellent first half but we must point out that a lot of these gains were led by a few select stocks with the equal weighted S&P 500 up about 5.1% in the first half of the year. Towards the conclusion of this letter, we elaborate on why we perceive the current environment to be similar to the 1970s rather than the late 1990s.
Our portfolio is heavily tilted towards technology companies. Technology, whether in the form of railroads, electricity, radio, motor vehicles, or the internet, has consistently had the potential to disrupt existing industries and create entirely new ones. We have learned through experience that investing becomes marginally easier, and far more profitable, when done in secularly growing and good quality businesses – as long as one pays attention to valuations.
Due to this, we have positioned ourselves in businesses such as EPAM and Endava which are IT services companies that help other corporations implement new technologies. These are good quality businesses with robust economics and are led by their founder CEOs. Currently, AI is the new technology trend and investor emphasis has been on investing in hardware to support AI capabilities. As the necessary hardware becomes more widespread, the focus will likely shift towards creating and optimizing AI applications. EPAM and Endava will benefit from this cycle as they have built a reputation for executing specialized and complicated IT projects. However, AI is still a new technology, and clients need time to identify the best use cases. This has led to a cautious “wait and see” approach from clients, which is currently suppressing demand for IT services. The timing of demand revival in the sector is uncertain and, as we have discussed before, the market hates uncertainty.
We believe the market has overreacted and EPAM and Endava are now trading at historically low multiples of depressed earnings. Eventually, corporations will need the help of EPAM and Endava in order to design, build, test, and implement AI applications. We have added to both stocks and lowered our cost basis, which we anticipate will enhance the overall internal rate of return (IRR) of the portfolio.”
Overall, EPAM ranks 9th on our list of 10 Worst-Performing Growth Stocks in 2024. While we acknowledge the potential of EPAM as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than EPAM, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.