It was in 2013 that Wharton finance professor Jeremy Siegel opined that stocks will remain the best bet in the years to come. Even as markets trade near all-time highs, this opinion is unlikely to change. However, investors need to be careful in terms of picking growth stocks and having a diversified portfolio.
In a well-diversified portfolio, stocks from mature industries provide an attractive dividend and help in reducing the portfolio beta. On the other hand, high-growth stocks serve as catalyst for upside in portfolio returns.
Therefore, growth stocks are important to hold in the portfolio. This column will discuss four growth stocks to buy that are likely to benefit from behavioral changes due to the novel coronavirus pandemic.
These stocks have a robust earnings growth outlook for the next five years. Further, it’s likely that earnings growth can potentially accelerate due to the pandemic impact on the way business is done.
Etsy (ETSY)
JD.com (JD)
Netflix (NFLX)
Shopify (SHOP)
With a projected annual earnings growth of
26.5% for the next five years, Etsy (ETSY) stock
is among the attractive growth stocks to buy.
Given the company’s business model of
connecting buyers and sellers online, it stands
to gain from changing trends. With the novel
coronavirus pandemic, sellers are increasingly
looking at setting up an online store. Etsy will
benefit from this in the coming years.
An early indication of this is already visible in the company’s second quarter results for 2020. The company reported a 136% surge in revenue and a healthy 35% growth in adjusted EBITDA. Among the positive trends, Etsy witnessed healthy growth in repeat and habitual buyers. With the company having a global presence, there is a big addressable market. According to Etsy, it’s in the range of $1.7 trillion.
The company’s free cash flow has grown from $28 million in the first quarter to $220 million for Q2. With an annualized FCF of $880 million, the company is well positioned to create value. Further, as earnings growth remains robust, FCF growth is also likely to be strong.
For the current year, ETSY stock has moved higher by 180%. However, I believe that there is more upside in the coming quarters. Given the current trend, the company is likely to surprise in terms of earnings growth and that will keep the stock momentum positive.
Etsy
I like JD stock from a growth perspective and
also from the perspective of regional
diversification. JD.com (JD) provides investors
with exposure to the largest retail market in the
world. It’s not surprising that the company’s
earnings growth is likely to be robust in the
coming years.
Last month, the company reported that
second-quarter revenue increased by 33.8%. In addition, the company reported strong growth in annual active customer accounts. This trend is likely to sustain with the company making inroads into semi-urban and rural markets.
One factor that sets JD.com apart from other Chinese e-commerce players like Alibaba (BABA) and Pinduoduo (PDD) is its robust logistics network. This gives JD.com a relative edge when it comes to market penetration in China.
For the last financial year, the company reported free cash flow of 19.5 billion yuan ($2.85 billion). Strong FCF allows the company to pursue aggressive organic and inorganic growth. Recently, the company acquired Kuayue-Express Group, which is an integrated express transportation enterprise specializing in “limited-time express service” in China.
Overall, JD.com has a strong growth visibility, steady improvement in margins and ample financial flexibility. These factors make JD stock attractive for the coming years and I expect the upside momentum to sustain.
JD.com
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in the securities mentioned in this article.
California-based Lumentum
(LITE) manufactures optical
and photonic products that
are used by optical net-
working and commercial
customers. One of the
brightest
lights in the sector, Lumentum, benefits from able management, and strong fundamentals. Its recent quarterly results confirmed that the business remains novel coronavirus proof, despite supply chain issues arising due to
the virus.
Revenue came in at $368.1 million, beating consensus estimates by $18 million. Net income is positive for the quarter and trailing nine months. Shares gained 5% pre-market after the Q4 beats on EPS and margins. However, supply chain issues buffeted the company during the quarter. But that’s an expected issue since we are in the middle of a pandemic. Many countries implemented restrictions on the free movement of goods. That affected Lumentum’s logistics, especially in countries like Malaysia.
With all that said, let’s discuss valuation a bit before wrapping up. With LITE stock trading at 53.14x trailing 12 months price to earnings, shares are hardly available at a discount. It’s arguable that the stock is in the overbought category. That’s not to say I am not bullish on its future. It’s just that I would wait for shares to drop 10% to 15% before buying in.
Lumentum Holdings
Workday (WDAY) stock is
interesting for two reasons.
First, the business model is
enormously attractive.
Workday’s HCM (human
capital management) platform
is of great value to large enterprises in particular. And it provides a base for steady expansion over time.
The second reason the stock looks attractive is relatively muted performance of late. WDAY stock actually is down over the past year, if by just 0.3%. According to a screen on finviz.com, there are 55 software stocks with a market capitalization over $10 billion. Only four, like WDAY, are negative over the past 12 months, and one of those is pandemic victim Uber (UBER).
To be sure, it’s possible concerns around the model explain that poor performance. Competition likely is one of those concerns. But it’s equally likely that WDAY stock will catch up to the myriad other names that have been among the most popular software stocks to buy. Earnings this week proves the point, as the company beat estimates for the second quarter.
Workday
Outside of Microsoft, perhaps
no large company has better
managed the transition to SaaS
than Adobe (ADBE). Its
Photoshop and Illustrator,
among other platforms,
traditionally were disk-based options.
They are now part of bundles, including Adobe Creative Cloud, that have driven impressive and consistent growth in recent years.
As with CRM, valuation admittedly is a concern. ADBE stock historically didn’t look that expensive, often trading at 30x forward earnings or less. It’s now as 43x.
But with MSFT itself clearing 30x, and CRM over 50x, that multiple on its face isn’t outrageous. And with Adobe’s growth likely to include e-signatures as well, there’s plenty of runway for the company to grow into the steep valuation assigned its stock.
Adobe
For the next five years, analysts expect the
company’s annual earnings growth at 30%.
Without doubt, Netflix (NFLX) is an attractive
growth stock to buy for the portfolio. As
earnings growth remains healthy, NFLX stock
has been trending higher.
However, the company has witnessed strong
subscription growth during the pandemic as
people look for a source of entertainment during quarantine.
In the second quarter, the company added a record 10.1 million paid membership as compared to 2.7 million in the same quarter a year ago. I would not be surprised if earnings growth guidance is revised on the upside for the coming years.
Original content is the key to sustained growth. For the most recent quarter, the company reported $899 million in FCF. As the company’s financial strength increases, there will be headroom for investing in quality content.
Netflix also has global presence with more subscribers outside the United States as a percentage of total subscribers. Therefore, the addressable market is significant and is another factor that will ensure that strong earnings growth sustains.
Netflix
Shopify (SHOP) stock is another attractive name
among the growth stocks to buy. I like the
company’s business model, which is likely to
ensure steady cash flows over the long term.
For the second quarter, the company reported
97% revenue growth on a year-on-year basis.
The important point to note is that revenue
from subscription solutions has been trending
higher. The company has subscription solutions for entrepreneurs, small-and-medium business as well as large brands.
As subscribers swell, the revenue and cash flow visibility increases. Further, brands generally start with the basic plan as advance to premium plans as business growth. Therefore, existing customers contribute to higher cash flows over time.
Shopify also happens to be one of the businesses that has witnessed strong growth after the novel coronavirus pandemic. New stores created on the platform in in the second quarter increased by 71% as compared to the first quarter. With a global presence, strong customer addition can translate into upwards revision in earnings estimates. This is likely to keep the momentum strong for SHOP stock.
Shopify
California-based
Lumentum (LITE)
manufactures optical
and photonic products that are used by optical networking and commercial customers. One of the brightest lights in
the sector, Lumentum, benefits from able management, and strong fundamentals. Its recent quarterly results confirmed that the business remains novel coronavirus proof, despite supply chain issues arising due to the virus.
Revenue came in at $368.1 million, beating consensus estimates by $18 million. Net income is positive for the quarter and trailing nine months. Shares gained 5% pre-market after the Q4 beats on EPS and margins. However, supply chain issues buffeted the company during the quarter. But that’s an expected issue since we are in the middle of a pandemic. Many countries implemented restrictions on the free movement of goods. That affected Lumentum’s logistics, especially in countries like Malaysia.
With all that said, let’s discuss valuation a bit before wrapping up. With LITE stock trading at 53.14x trailing 12 months price to earnings, shares are hardly available at a discount. It’s arguable that the stock is in the overbought category. That’s not to say I am not bullish on its future. It’s just that I would wait for shares to drop 10% to 15% before buying in.
Lumentum
Holdings
If an investor is going
to own an SaaS stock,
one place to start is
with the company
that brought the model to the mainstream. Salesforce (CRM) went after Oracle’s dominance in CRM (customer relationship management) software via its cloud model.
Since then, CRM stock has been one of the best in the market. It’s returned 4,750% since its 2004 initial public offering. That’s a staggering annualized return over 25%.
The gains are going to slow going forward, but they’re unlikely to stop. Salesforce still has a massive lead in CRM, though HubSpot (HUBS) is trying to chip away. The 2016 acquisition of Demandware moves the company more heavily into e-commerce as well.
To be sure, CRM stock isn’t cheap. But it hasn’t been pretty much ever. This seems a classic case of investors paying up for quality.
Salesforce
Workday (WDAY)
stock is interesting for
two reasons. First, the
business model is
enormously attractive. Workday’s HCM (human capital management) platform
is of great value to large enterprises in particular. And it provides a base for steady expansion over time.
The second reason the stock looks attractive is relatively muted performance of late. WDAY stock actually is down over the past year, if by just 0.3%. According to a screen on finviz.com, there are 55 software stocks with a market capitalization over $10 billion. Only four, like WDAY, are negative over the past 12 months, and one of those is pandemic victim Uber (UBER).
To be sure, it’s possible concerns around the model explain that poor performance. Competition likely is one of those concerns. But it’s equally likely that WDAY stock will catch up to the myriad other names that have been among the most popular software stocks to buy. Earnings this week proves the point, as the company beat estimates for the second quarter.
Workday
Outside of Microsoft,
perhaps no large
company has better
managed the
transition to SaaS than Adobe (ADBE). Its
Photoshop and Illustrator, among other platforms, traditionally were disk-based options.
They are now part of bundles, including Adobe Creative Cloud, that have driven impressive and consistent growth in recent years.
As with CRM, valuation admittedly is a concern. ADBE stock historically didn’t look that expensive, often trading at 30x forward earnings or less. It’s now as 43x.
But with MSFT itself clearing 30x, and CRM over 50x, that multiple on its face isn’t outrageous. And with Adobe’s growth likely to include e-signatures as well, there’s plenty of runway for the company to grow into the steep valuation assigned its stock.
Adobe
(On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in the securities mentioned in this article.)