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July 17, 2019, 10:00 a.m. EDT

Why these pricey growth stocks are worth keeping, according to UBS

Critical information for the U.S. trading day

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By Barbara Kollmeyer, MarketWatch


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Netflix reports later.

After Tuesday’s trade-tweet related hit for equities, investors should be ready for a distraction.

That may come from some big names out later, including Netflix, whose shares have soared 6,000% over 10 years. Netflix is a classic example of a growth stock – offering above-average returns, but with the potential of higher risk for investors.

But some on Wall Street are concerned that the cost of those stocks, or valuation, is expensive, and indeed, this UBS chart shows that to be the case:

That leads us to our call of the day, also from UBS, whose equity strategists Francois Trahan and Samuel Blackman say we are “potentially at a very important point for growth investments.”

They offer up a second chart, which shows how the S&P 500 Pure Growth Index -- compiled of those types of companies -- tends to “go nowhere fast” once the Institute for Supply Management’s (ISM) survey of purchasing managers dips below 50. That key data point is right at 50 currently.

As the strategists explain, the reason those stocks stall out is because investors shift out of growth stocks to other themes such as defensive names as they get wary on the state of the economy. But their research shows that not all of those stocks fade, and that top performers tend to do well even as the ISM drops under 50. UBS has tried to identify the top stocks.

What does seem to be the key, UBS finds, is how volatile a particular stock tends to be compared to the overall stock market. The measurement of that volatility is referred to as beta. And lower-beta stocks, as their chart shows, tend to perform better even in the worst of times.

Click on any ticker to see that company’s beta. The market has a beta of 1 and a stock with a higher beta has been more volatile than the market.

Read: A record share of investors are worried buybacks and dividends are too generous

The market

U.S. stocks opened a little bit on the weak side, with the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.79%   down 15 points.

Gold and oil rose while the dollar /zigman2/quotes/210598269/delayed DXY -0.69% fell.

Europe stocks /zigman2/quotes/210599654/delayed XX:SXXP +0.33% are steady and Asia /zigman2/quotes/211618636/realtime XX:ADOW +0.88% was mostly weaker.

/zigman2/quotes/210598065/realtime
US : Dow Jones Global
28,132.05
+220.75 +0.79%
Volume: 277.74M
Dec. 12, 2019 4:55p
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/zigman2/quotes/210598269/delayed
US : U.S.: ICE Futures U.S.
96.74
-0.68 -0.69%
Volume: 0.00
Dec. 12, 2019 6:05p
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/zigman2/quotes/210599654/delayed
XX : STOXX
407.58
+1.36 +0.33%
Volume: 0.00
Dec. 12, 2019 5:50p
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/zigman2/quotes/211618636/realtime
XX : Dow Jones Indices
3,425.65
+29.96 +0.88%
Volume: 0.00
Dec. 12, 2019 7:22p
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