In this piece, we will take a look at Wells Fargo’s top growth stocks and the stocks with the highest consensus EPS growth estimates.

With the interest rate cycle kicking off in the US, stocks that are exposed to consumer and business spending are starting to see a favorable economic outlook. The stock market has also undergone a correction following the victory of President-elect Donald Trump and the Republican Party in the 2024 US Presidential Election. This correction has seen stocks that respond favorably to lower regulations, such as traditional energy, oil stocks, and banks, rise. At the same time, others, particularly green energy stocks, have not fared so well.

Consider the performance of the S&P’s bank, energy, and green energy stock indexes as a brief example. Starting from the bank stock index, it has gained 8.8% since the election on November 5th (as of writing). During the same period, the flagship S&P index is up by a more modest 1.64%. Similarly, the S&P’s energy stock index has also outpaced the benchmark index by gaining 4.29%. On the flip side, the green energy stock index is down by a staggering 8.9%.

Naturally, with the future for several sectors uncertain, this also calls for portfolio finetuning. On this front, investment bank Wells Fargo shared insights in its recent report following the election. Analyst Austin Pickle shared that his bank believes that “it is important not to let election outcomes and emotions drive investing decisions.” This is because politicians often make big policy promises during campaigns which are then watered down at the time of implementation due to “prioritization and give-and-take with Congress and the legal system.”

To prove that “equity returns are most heavily influenced by the economy’s long-term growth trend as well as fundamental supports that drive earnings growth,” the analyst shares data about stock price performance during Democrat and Republican administrations. Two key takeaways from this are particularly noteworthy. On the qualitative front, Pickle outlines that “market turbulence has occurred during both Democrat and Republican administrations, but overall, stocks have tended to advance regardless of who is in the White House.” The second takeaway is more striking and relevant since it involves money – which is, after all, the primary focus of any investor.

The WF analyst points out that if an investor in 1944 had invested $1,000 in the flagship S&P index, their investment would be worth more than $7 million today provided all dividends paid were reinvested. He goes further and cites the performance of small caps, real estate, energy, and clean energy stocks following the 2016 and 2020 US presidential elections. Its data shows that from the day of the 2016 election to year-end, small-cap and energy stocks delivered roughly 10% and 2% in excess returns, respectively, to the flagship S&P. However, from the 2016 election to the 2020 election, these categories lagged the benchmark by ~30% and ~120% in relative returns.

Similarly, after President Biden’s victory in the 2020 election to 2020 end, clean energy stocks delivered more than 20% in relative returns. Yet, by the 2024 election, they were down roughly 110%. Consequently, the bank “urges caution” for investors who are exclusively betting on campaign promises to materialize into policy action that generates tailwinds for stocks or other assets.

Shifting gears, while the tail-end of 2024 has seen the stock market driven by the election, other factors are also important to determine its performance. One factor that has been all the hype for more than a year is artificial intelligence. So far, AI-based stock returns have focused on a handful of companies. One of these is the GPU-designer whose shares are up by 736% since the start of December 2022 – or soon after OpenAI publicly unveiled ChatGPT. Between September 2023 and now, Wells Fargo uses the Gartner Hype Cycle to evaluate the sentiment surrounding AI in its report titled ‘Generative AI — AI buildout continues as monetization challenges emerge.’

Between then and now, the bank believes that “generative AI has likely progressed from the “peak of inflated expectations” stage in the Gartner Hype Cycle into the “trough of disillusionment” stage.” This means that businesses using or looking to use AI are now balancing costs with the productivity and other benefits offered by the technology. The firm also concurs with investment bank Goldman Sachs for the fact that investor attention to AI is now broadening out to firms that will provide the infrastructure needed to build out AI facilities. We covered these trends in detail as part of our coverage of Goldman Sachs’ Best Phase 2 AI Stocks: Top 24 High Conviction AI Stocks, and Wells notes that interest is now shifting to firms “building out the data-center infrastructure and supporting the need for reliable power and efficient cooling.”

While generative AI might be in the “trough of disillusionment,” the disillusionment doesn’t mean that generative AI won’t generate economic value. According to Wells Fargo’s research, the “overall market for generative AI could grow at a compound annual growth rate of approximately 49%, from $11 billion in 2020 to $1.36 trillion in 2032” and generate revenue for supportive products such as chips and networking solutions.

Within the AI market, two key functionalities drive performance. These are AI training and AI inference. Both require GPUs and other data center infrastructure. The first is the ‘back-office’ of AI where companies prepare their models for the second feature which involves ‘consumer-facing’ operations of generating inferences in response to queries. In terms of revenue generation potential, training is naturally larger in 2024 and will continue to remain so for every year until 2032 since it includes building facilities to create AI software.

However, Wells cites OpenAI’s o1 to share that inference revenue will grow faster. o1 was the first true upgrade to GPT from OpenAI. OpenAI’s data shows that the new artificial intelligence model ranks in the 89th percentile for complex coding problems and improves performance on the LSAT and MATH Benchmark by more than 20 percentage points. The strong performance requires significantly more computing power for inferences, and it underscores the faster growth rate for this portion of the AI market.

According to WF’s research, the training market can sit at $471 billion in 2032 while the inference market could touch $169 billion. While this potential is all well and good, it represents only a part of the AI debate and does not cover all of the risks. Most AI use cases right now are limited to the business world through enterprise and cloud computing. For the everyday consumer, AI use cases at the ‘edge’ are relevant. These include smartphones and laptops and are a major reason why the firm behind the iPhone has seen its shares rise by 16.5% since WWDC 2024 when it unveiled Apple Intelligence. Apple Intelligence is one of the first across-the-board edge AI use services, and as per WF, there is “more evidence of generative AI moving to the edge, meaning that generative AI models are being deployed directly onto local edge-computing devices (such as PCs and smartphones) that allow devices to process data locally instead of relying on the cloud.” This evidence could also drive a new PC replacement cycle in 2025, believes the bank.

Yet, at the same time, the bank is also cautious. It notes that while AI has the potential to proliferate across a wide range of industries ranging from healthcare to retail, there is a need for caution as well since investors often heavily invest in emerging technologies before the technologies can fully deliver.

Our Methodology

To make our list of Wells Fargo’s best growth stocks, we used the bank’s recent Growth List, ranked the stocks by the consensus long-term EPS growth estimate, and picked those with 7% or higher growth. Wells selected the stocks by focusing on firms with a market cap greater than $1.5 billion, annual revenue of $500 million or more, and a forward EPS CAGR of 5% or more.

For these stocks, we also mentioned the number of hedge fund investors. 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).

28. Tesla, Inc. (NASDAQ:TSLA)

Consensus Long-Term EPS Growth Estimate: 9%

Number of Hedge Fund Holders: 85

Tesla, Inc. (NASDAQ:TSLA) is a well-known electric vehicle company spearheaded by Elon Musk. While most companies’ narratives are mostly divorced from their leadership and based on their products and operations, Tesla, Inc. (NASDAQ:TSLA) also benefits from Musk’s reputation as one of history’s most successful entrepreneurs. Musk’s role means that the firm’s hypothesis is two-fold. At one end, and as has been the case throughout 2024, Tesla, Inc. (NASDAQ:TSLA) is dependent on the health of the electric vehicle market. Prior to the 2024 Presidential Election, the stock was down 2.25% year-to-date as dropping EV demand stressed the firm’s margins through low-volume shipments and defensive pricing. Following the election, Musk’s proximity with the Trump campaign has injected fresh fervor in investors surrounding Tesla, Inc. (NASDAQ:TSLA)’s ability to benefit from favorable regulations. Consequently, the stock has gained 32% since then. On a broader note, the firm is still dependent on its ability to launch a low-cost electric vehicle, the success of its autonomous driving software, and the Cybercab.

Baron Funds mentioned Tesla, Inc. (NASDAQ:TSLA) in its Q2 2024 investor letter. Here is what the fund said:

“As discussed in the Fund’s prior shareholder letter, the fears about Tesla’s products were misplaced. Instead of the company being exclusively dependent on limited vehicle models and software advancement, the company announced it will more rapidly introduce products that appeal to a wider audience. It also demonstrated that its price reductions were the result of efficiencies rather than only to spur demand. Margins exceeded expectations. And the company’s integration of its hardware with proprietary AI software should facilitate full self-driving capabilities and subsequent new revenue streams. This integration of hardware with software creates a dynamic growth company as it more fully explores its potential with Optimus, humanoid robotics. The combination of these catalysts resulted in Tesla’s stock increasing meaningfully and rapidly in the second half of the quarter. This stock price momentum has continued into the next period.”

27. Zoetis Inc. (NYSE:ZTS)

Consensus Long-Term EPS Growth Estimate: 10%

Number of Hedge Fund Holders: 61

Zoetis Inc. (NYSE:ZTS) is a specialty drug company that focuses on animal health. Its products include medicines to combat skin diseases, infections, and other ailments. Since the firm also targets the consumer market, its revenue is somewhat discretionary and depends on consumer spending power. As a result, it is unsurprising that Zoetis Inc. (NYSE:ZTS)’s shares are down by 10.9% year to date. To understand how dependent the firm is on consumers, consider its revenue during the first half of the year. In this time period, Zoetis Inc. (NYSE:ZTS) raked in $4.6 billion in sales, out of which 65% were through its companion health business. Within companion health, cats and dogs account for 98% of the revenue. Consequently, a broader recovery in consumer spending is the only factor that can introduce tailwinds for Zoetis Inc. (NYSE:ZTS).

Just like any pharma company though, Zoetis Inc. (NYSE:ZTS)’s success depends on key drugs. Here’s what management shared during the Q3 2024 earnings call:

“By maintaining a strong focus on innovation, we set the standard for improving patient outcomes, higher customer satisfaction, and strong partnerships with veterinarians and pet owners. Our osteoarthritis pain franchise, Librela and Solensia, continues to make a transformative impact by addressing a critical unmet need, delivering 97% operational revenue growth globally. From our conversations with customers around the world, it’s clear that our safe effective solutions are making a meaningful difference in patients’ lives. We recognize the profound impact of our work, which only strengthens our commitment to developing this market. We have navigated this path before and understand that building a new category of care requires a steady strategic approach.

As we lap the U.S. Librela launch, we continue to grow share, even in a market where canine pain visits typically slow down from Q2 to Q3. In fact, Librela is actively disrupting this trend by driving more clinic visits and increasing engagement. With $55 million in U.S. quarterly sales, we see significant opportunity to further expand share and utilization. In just 11 months, we have treated 1 million dogs, compared to an estimated 8 million receiving other treatments, and Librela have already become the fourth largest product in U.S. pet care. This highlights the demand and long-term growth potential, reinforcing our confidence in the franchise’s $1 billion trajectory. With record market penetration in the U.S., we’re only scratching the surface of broader utilization potential.”