We recently compiled a list of the 10 Best QQQ Stocks to Buy According to Analysts. In this article, we are going to take a look at where DexCom Inc. (NASDAQ:DXCM) stands against the other QQQ stocks.
Navigating High Valuations and Stock Opportunities
Several recent discussions have focused solely on the implications of the Fed’s recent rate cut for the market. Analysts have noted that smaller interest rate reductions are expected as the Fed adopts a long-term perspective on monetary policy. Despite earlier recession predictions, there is a bullish outlook for the market now.
Economic data indicates strong growth. The current environment is characterized as stable, suggesting that additional quarter-point cuts could be beneficial. Just as October began, Richard Fisher, Jefferies’ senior advisor, joined CNBC to make a discussion on the concerns about whether current rates are too restrictive, with arguments that financial conditions remain supportive. We covered this in detail in our 10 Most Undervalued Quality Stocks To Buy According To Analysts article, here’s an excerpt from it:
“He highlighted the significance of recent economic data, particularly from the Atlanta Fed, which indicates strong growth above 3%. Fisher characterized the current economic environment as experiencing neither a soft landing nor a hard landing, but rather a smooth glide path. He believes that two more quarter-point cuts would be appropriate to maintain this trajectory. When discussing concerns about whether current rates are too restrictive relative to inflation, Fisher disagreed with the argument and pointed out that financial conditions remain accommodative, citing narrow spreads and strong private lending activity. He argued that with another two cuts, the Fed would not be overly restrictive.”
Analysts caution against declaring victory regarding economic stability too soon. The ongoing evaluation of monetary policy will continue until 2026. Under a similar discussion, Michael Kantrowitz, chief investment officer at Piper Sandler, joined CNBC on October 14 to discuss the outlooks on overvalued markets, as he thinks that over-valuation is no reason to get bearish.
The financial markets marked the second anniversary of the ongoing bull market, which has seen stock prices rise at the second-fastest pace since 1950. Michael Kantrowitz noted that while markets may appear expensive, this does not necessarily warrant a bearish outlook unless new risks emerge. Kantrowitz emphasized that many valuation models have indicated that the market has been expensive for some time, but he believes it is essential to understand the catalysts driving these valuations.
He explained that the significant rise in market multiples over the last two years can largely be attributed to the pricing out of risks that were prevalent two years ago, such as inflation and high interest rates. Kantrowitz stated that these concerns have largely been factored into equity prices, which is why the market is where it is today. He argued that an expensive market alone is not a reason to adopt a bearish stance; instead, potential spikes in interest rates or renewed inflation fears could trigger such a sentiment. Currently, however, he sees no immediate threats on the horizon.
When discussing sector performance, Kantrowitz clarified that his focus is less on broad sectors and more on individual stocks with strong earnings momentum. He acknowledged that while sectors like technology may appear expensive overall, there are still individual stocks within those sectors that continue to show earnings growth. He stressed the importance of earnings revisions as a key factor in stock selection and portfolio construction.
Addressing concerns about rising bond yields, Kantrowitz acknowledged that higher yields could pose challenges for equity markets. He recalled how earlier in the year when ten-year Treasury yields rose from around 3.80% to approximately 4.30%, equity markets initially remained stable but began to feel pressure as rate-sensitive stocks started underperforming. He noted that utilities and real estate sectors had benefited from lower rates but were now facing challenges as rates increased.
Kantrowitz also commented on various economic indicators suggesting mixed signals in the market. For instance, he mentioned metrics like rail freight carloads and corporate misery indices indicating weak demand. However, he cautioned against overreacting to these indicators, noting that downward earnings revisions are common as companies adjust their forecasts throughout the year. Historically, Q4 tends to see significant downward revisions as companies align their expectations with actual performance.
In the current economic climate, characterized by uncertainty and mixed signals, the importance of quality stocks cannot be overstated. Quality stocks, those with strong earnings momentum and resilient business models, are particularly well-positioned to navigate these turbulent times. As concerns about rising interest rates and inflation persist, investors may find that high-quality companies with solid balance sheets and consistent profitability can offer a buffer against volatility.
Methodology
We first sifted through the Invesco QQQ exchange-traded fund (ETF) holdings to find the ones with an upside potential of over 25% as of October 14, 2024. We then selected 10 stocks with the highest upside potentials that were also the most popular among elite hedge funds and that analysts were bullish on. The stocks are ranked in ascending order of their analysts’ upside potential.
Why are we interested in 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).
A doctor demonstrating how to use the medical device to a patient with diabetes.
DexCom Inc. (NASDAQ:DXCM)
Average Upside Potential: 33.65%
Number of Hedge Fund Holders: 64
DexCom Inc. (NASDAQ:DXCM) develops, manufactures, produces, and distributes continuous glucose monitoring systems for diabetes management. Its CGM (continuous glucose monitoring) systems use a small sensor that is inserted under the skin to continuously measure glucose levels and transmit the data to a compatible device, such as a smartphone or watch, allowing users to monitor their blood sugar trends, make informed decisions about insulin dosing, and improve overall diabetes management.
The company exceeded expectations with earnings per share of $0.43 in Q2 2024. Although revenue of $1 billion fell short of the estimated $1.04 billion, it still showed 15.26% year-over-year growth. International revenue grew 7%. Its continuous technological advancements in CGM and its increasing market share in the healthcare sector demonstrate its strength in a rapidly evolving industry.
Similar to Insulet, which offers insulin delivery systems, DexCom Inc.’s (NASDAQ:DXCM) devices enable round-the-clock glucose monitoring. This gives it a strong competitive advantage in a relatively stable market. However, the company’s reliance on disposable sensors (94% of revenue) and distributors (85% of H1 2024 revenue) exposes it to potential risks from competitors and supply chain disruptions. The launch of Stelo, its first over-the-counter nonprescription glucose biosensor, is a major catalyst for growth in Q2.
Despite facing competition from industry peers and concerns about market demand, the company’s innovative products and technology offer significant potential for growth. Its ability to differentiate its offerings and adapt to changing market conditions will be crucial for its future success.
The company offers significant potential for growth in the rapidly expanding diabetes market. However, recent challenges, including increased competition and concerns about GLP-1 drugs, have impacted its stock performance. Still, DexCom Inc. (NASDAQ:DXCM) remains a promising investment.
Ithaka US Growth Strategy stated the following regarding DexCom, Inc. (NASDAQ:DXCM) in its Q2 2024 investor letter:
“DexCom, Inc. (NASDAQ:DXCM) is a medical device company focused on the design, development, and commercialization of continuous glucose monitoring (CGM) systems, primarily for people with diabetes. Diabetes is a chronic, life-threatening disease for which there is no known cure. DexCom’s CGM system is superior to traditional fi nger-stick tests because it provides users with continuous data (including glucose trends and time spent in hyper or hypoglycemia) versus a snapshot in time. Dexcom’s stock suffered despite a solid earnings announcement that beat Street expectations across the board. The fall in the stock price was likely due to missing elevated buy-side expectations following multiple quarters of accelerating fundamental growth.”
Overall DXCM ranks 6th on our list of the best QQQ stocks to buy according to analysts. While we acknowledge the growth potential of DXCM as an investment, our conviction lies in the belief that AI stocks hold great promise for delivering high returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than DXCM but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.