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Forget about the ‘Magnificent 7,’ the ‘Fantastic 5’ could provide greater earnings and return potential

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Looking for a less risky way to find growth stocks amid all the artificial intelligence hype? A potential solution may lie overseas. Portfolio manager Nicholas Anderson from Thornburg Investment Management identified a group of European stocks that trade in the U.S. with the potential for faster earnings growth than the tech-focused “Magnificent Seven” stocks dominating the U.S. market. Anderson named this overseas group the “Fantastic Five,” consisting of Novo Nordisk, ASML Holding, LVMH, AstraZeneca, and SAP.

For the nine quarters ending in the first quarter of 2024, the Fantastic Five portfolio returned 32%, outperforming the Magnificent Seven portfolio, which returned 25%. The European group’s stronger performance is expected to continue, with lower forward price-to-earnings ratios and faster earnings growth over the next three years compared to the Mag Seven. Anderson suggests that U.S. investors should consider increasing their international allocation as European companies offer impressive growth prospects and are undervalued relative to their American counterparts.

The European group’s diversity in growth sources, which includes AI plays, GLP-1 anti-obesity drugs, and luxury retail markets, makes it more attractive than the heavily tech-focused Mag Seven, especially given the S & P 500’s reliance on Big Tech. Anderson believes that the Fantastic Five may outperform the U.S. market if the AI hype subsides, offering lower exposure to that theme. He recommends active stock-picking in the international market to reduce risk.

Key drivers of the Fantastic Five’s growth are Novo Nordisk and ASML, according to Anderson. Novo Nordisk, a Danish pharmaceutical giant, has a leading position in the market for GLP-1 diabetes and obesity drugs, with demand surging for its weight loss drug Wegovy and diabetes drug Ozempic. ASML, the largest producer of semiconductor manufacturing equipment in Europe, provides essential lithography equipment for producing AI chips. The company’s “sleeper AI exposure” is expected to see a significant uptick in AI bookings over the next year.

While Novo Nordisk’s U.S.-listed shares have surged 36% this year, analysts believe the stock may be slightly overvalued. ASML’s U.S.-listed shares have increased almost 38% year-to-date, with analysts forecasting a potential 5% upside. Anderson highlights Amazon and Alphabet in the Magnificent Seven as his preferred picks with strong AI strategies. Both stocks have seen positive performance this year, with AWS and Alphabet’s cloud-computing unit benefiting from increasing demand for AI infrastructure.

Anderson manages the Thornburg International Growth Fund, which focuses on high-quality companies based outside the U.S. and has gained approximately 10% year-to-date. With Thornburg managing $43 billion in clients’ assets as of January 2024, Anderson’s insights into the potential of European stocks offer U.S. investors a compelling opportunity to diversify their portfolios and tap into overseas growth opportunities. By considering the Fantastic Five as a way to navigate the volatile AI-focused market, investors can potentially achieve superior returns while reducing risk.

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