When you hear the term "stock market index," chances are the S&P 500, Nasdaq Composite, or Dow Jones Industrial Average comes to mind. But the Nasdaq-100 is also a widely talked about index.
Whereas the Nasdaq Composite includes over 3,000 companies, the Nasdaq-100 consists of only the 100 largest companies in the Nasdaq. Since these companies are so large, the Nasdaq-100 makes up over 90% of the Nasdaq Composite. And it's a good place for investors to look for large-cap growth stocks.
Here's why Tesla (TSLA -1.11%), Broadcom (AVGO 3.84%), and Honeywell International (HON 0.22%) stand out as three top Nasdaq-100 stocks to buy in 2024.
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Tesla is still a high-growth story stock
Lee Samaha (Tesla): There can't be many companies like Tesla that hold a 56% share of their core market but are still worth buying for their high growth prospects.
However, the electric vehicle (EV) market is still growing -- EV sales were up 49% in the first nine months of 2023 compared to the same period in 2022. As such, Tesla's leading market share (based on year-to-date sales in the U.S. EV market) shouldn't be looked at as something to be attacked. Instead, it's a key foothold and a leadership position that can continue dominating the opposition as EV sales grow.
In addition, there's the long-term potential of robotaxis and new models, such as the much-anticipated $25,000 hatchback, to consider. Tesla's leadership in the EV market means it can allocate substantive funds to research and development to produce new products and open up new markets. In addition, its investment in ramping up production lowers its cost per vehicle, enabling it to offer affordable EVs and continue winning sales.
Despite its $753 billion market capitalization, Tesla is not a mature car company or some new-age conglomerate. Instead, it's a stock with the characteristics of a high-growth story, only that it's less risky than most other hyper-growth stocks because it's already demonstrated leadership and expertise in the marketplace.
Broadcom is an intelligent way to invest in AI
Scott Levine (Broadcom): It's almost impossible these days not to hear Nvidia's name when investing talk turns to semiconductors and artificial intelligence (AI). But it's hardly the only game in town. In fact, Broadcom, the fourth-largest stock in the Nasdaq-100, holds an even more prominent position than Nvidia, which ranks sixth. And right now, Broadcom's growth prospects -- as well as the stock's price tag -- look especially appealing.
From facilitating connectivity between devices to automotive electronics to enterprise software, Broadcom provides a diverse assortment of tech offerings to customers. Its industry-leading position in AI, however, will be a major factor contributing to the company's growth in the coming years. Broadcom's high-speed Ethernet switches, for example, help networks handle the high demands that AI and machine learning place on them in terms of workload.
On the company's fourth-quarter 2023 conference call, management projected "networking revenue to grow 30% year on year, driven by accelerating deployments of networking connectivity, an expansion of AI accelerators in hyperscalers." And it's not only hardware where Broadcom sees AI contributing to revenue growth. While generative AI accounted for 15% of the company's semiconductor revenue in 2023, management expects it to represent more than 25% of semiconductor revenue in 2024.
Looking more broadly at 2024, Broadcom projects revenue of $50 billion. Should it achieve this guidance, it will represent impressive year-over-year revenue growth of 40%.
On its surface, Broadcom's price tag doesn't seem cheap since shares are valued at 33 times trailing earnings. However, they represent a discount to the stock's five-year average trailing price-to-earnings (P/E) ratio of 38. And with Nvidia valued at 70 times trailing earnings, Broadcom's price seems a lot more palatable.
Honeywell has explosive potential
Daniel Foelber (Honeywell): The Honeywell of today is far from a growth stock. Revenue and earnings have languished, organic growth was 6% in 2022, and it averaged just 5% between 2017 and 2021. But Honeywell is doing something about it by recognizing it needs to realign its business.
The plan is to focus on three megatrends -- automation, the future of aviation, and the energy transition. The company plans to invest organically in these trends and make acquisitions that align with these goals. It also plans to trim business lines that don't enhance these new strategic efforts.
All told, Honeywell expects to be a higher-margin business and hit the high end of its long-term organic growth goal of 4% to 7%. That may not sound like much. But given where Honeywell has been over the last five years, it's a much-needed step in the right direction.
The real potential lies much further down the road. For a while now, Honeywell has bet big on the industrial intent of things (IIoT) -- a concept that aligns the digital world with the physical world by making industrial processes smarter, interconnected, and more efficient. It sounds great, but what does it look like in practice?
Well, one example would be a warehouse. Honeywell is a major player in warehouse automation. It has a variety of solutions to make these operations more digitally connected. For example, Honeywell makes automated storage and retrieval systems that have been shown to deliver 30% to 40% increased throughput compared to manual systems. This is just one of many physical products with a digital value add that Honeywell makes.
Right now, Honeywell is a low-growth, stodgy industrial conglomerate with a P/E ratio of 25 and a dividend yield of 2.1% -- which is nothing special. The company has made exciting investments, but they often get mixed up in a hodgepodge of legacy programs and a business structure that makes it difficult to discern software investments from hardware. Honeywell desperately needs a realignment. We could be in the first inning of that now.
Investors who want to be ahead of the curve could consider buying Honeywell. But it also wouldn't hurt to wait a while to get a better picture of what the new Honeywell could look like.
