It's time to buy these fallen growth stocks, Wells Fargo says

Published Fri, Jul 29 202211:52 AM EDT

The current interest-rate tightening cycle could create a solid backdrop for growth stocks, making now a good time to buy certain names, according to Wells Fargo. The Federal Reserve on Wednesday raised its benchmark interest rate by three-quarters of a percentage point, the second consecutive hike of that size in its campaign to calm high inflation. Going forward, Wells Fargo sees the central bank continuing to tighten by an additional three-quarters of a percentage point to one full percentage point by November. That could give fallen growth stocks a boost. "We see this lower-inflation, slower-growth environment as prerequisites for the Growth style to make a comeback," Wells Fargo analyst Chris Harvey wrote in a Wednesday note. The bank has become more positive on growth names in the last few months, and especially stocks that were moved into the value index or have been significantly re-rated, including names such as Netflix , PayPal , Meta Platforms and more. "In simple terms, these are stocks that were kicked out of (or significantly reduced in) the R1000 Growth Index and added to (or significantly up sized in) the R1000 Value Index during June's rebalance," wrote Harvey. Wells Fargo also sees these stocks as poised to grow going forward because the earnings-per-share growth cycle for deep value names has either hit a peak or will soon. That means that value portfolio managers will be net sellers of those deep value stocks. Second, the rebalance of the Russell indexes will force value portfolio managers to consider growth names like the ones Wells Fargo highlights. This is because these names are a significant part of the index, Harvey wrote. "For example, META now is > 1.5% of the R1000 Value index," he said. Finally, these stocks generally possess more steady earnings streams than other value stocks, even if their earnings power is not what it used to be. "As economic growth decelerates, investors likely will place a premium on stability (or perceived stability) and, we believe, many of the stocks in our list," said Harvey.