7 Great Growth Stocks (and 4 Great Growth Funds)
Buying shares of a growth company early in its run to greatness is the holy grail of stock picking. The goal is to get in at a relatively cheap price, hang on as revenue and earnings rise sharply, and reap big returns as other investors hop aboard. But after the stock market’s phenomenal five-year bull run, finding undiscovered gems today is no easy feat.
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That leaves growth-seeking investors with two options. One is to identify successful companies with strong growth prospects and figure out what you would like to pay—then hope for a market pullback that brings their prices into your range. With steep declines this year in many technology and biotechnology stocks, investors in those sectors suddenly have a lot of marked-down shares to sift through.
The second option is to look for growth companies that may keep flying high but whose share prices relative to expected earnings are still reasonable for a long-term investor. Like it or not, having a long time horizon is key at this stage of a bull market. Buying at today’s price levels may mean it will be five years or more before a stock realizes meaningful appreciation. So you have to ask yourself: How patient am I?
We went hunting for attractive growth companies and came up with seven. They cover a broad spectrum of sizes, industries and growth rates, but they all share one trait: In the view of Wall Street analysts, their earnings will rise significantly faster than the 10.2% average annual earnings growth predicted for Standard & Poor’s 500-stock index over the next three years. (The actual growth rate for the broad market will almost certainly be lower than what Wall Street expects.) We rank our picks by market value. Prices and related data are as of May 30. Price-earnings ratios are based on estimated year-ahead profits.
1. Walt Disney. Disney (DIS) is a Wall Street rarity: a growth story that spans generations. Disney was a phenomenal growth company in its early days. It stumbled in middle age, then came roaring back beginning in the mid 1980s. Today, the Burbank, Cal., company remains the premier U.S. entertainment franchise, with its film studios (latest hit: Frozen), TV networks (including ABC and ESPN), theme parks, resorts, home videos and consumer products.
With $45 billion in annual revenues, Disney can’t grow at the pace of smaller, up-and-coming businesses. But it offers investors the benefits of a blue-chip company that’s still capable of market-beating growth. Analysts estimate that Disney’s earnings will rise an annualized 16% over the next three years, well above the overall market’s growth rate. Even allowing for typical Wall Street over-optimism, there is good reason to believe that Disney’s growth rate will stay above the blue-chip average.
Key to the company’s success is its ESPN juggernaut. Led by the sports channels, Disney’s cable networks now generate 52% of the company’s total operating profit. But beyond cable, Disney’s ability to consistently find new ways to make money from its treasure trove of assets—from Mickey to Buzz Lightyear and Captain America—is unparalleled in the media industry, says Morningstar analyst Peter Wahlstrom. What’s more, in the boom-or-bust movie business, Disney’s 2012 acquisition of the rights to the Star Wars franchise heralded what FBR Capital Markets analysts say is a major shift by the studio unit. By focusing more on films with proven track records such as Star Wars (Episode VII is due out in late 2015), Disney aims for a “much more profitable, less risky” slate of future releases, FBR says. Nothing wrong with sticking with what works.
Data as of May 30. *Based on estimated earnings for the next four quarters.
2. Qualcomm. Like Disney, Qualcomm (QCOM) knows a thing or two about managing a growth business. The company has mushroomed over the past 30 years into a global leader in wireless technologies. That puts it at the heart of the continuing rush throughout the world to be connected—to anyone and, increasingly, to anything.
Qualcomm earns technology-licensing fees on nearly every 3G and 4G wireless phone sold. The San Diego company also produces the chips that help run many high-end smart phones and tablet computers. All told, Qualcomm earned $7.9 billion, or $4.51 per share, in the fiscal year that ended last September, representing a doubling of profits since 2010. That pace isn’t likely to continue, in part because Qualcomm faces rising competition in the smart-phone chip business from other tech titans, including Intel.
Still, the company’s size and technological know-how give it an advantage over rivals as consumers and businesses worldwide demand faster and more-intelligent wireless phones. Brian Modoff, an analyst at Deutsche Bank Securities, says that Qualcomm sees great possibilities in the development of the “Internet of things,” the connecting of everything from homes to cars to appliances via smart phones and other devices. He expects earnings to rise 17% in the current fiscal year and 15% in the year that ends in September 2015, and he adds that Qualcomm executives are committed to sharing profits with shareholders via dividends (now $1.68 per share annually). Investors looking to play the telecom industry can certainly find smaller, faster-growing companies. But if you want a marquee name at the forefront of wireless technology, Qualcomm fits the bill.
3. Actavis PLC. It seemed a slam-dunk in the late 1990s to bet that the giant U.S. drug companies would make a lot of money off an aging population. But stocks such as Merck and Pfizer were terrible performers in the first decade of the new century as the companies lost patent protection for key products and makers of generic drugs swooped in. Now comes generic firm Actavis (ACT) with a reverse strategy: It is buying up brand-name drug makers to boost its long-term prospects by lessening its dependence on the cutthroat generic business.
Actavis, the third-largest U.S. generic drug firm, spent $8.5 billion last year to buy Ireland’s Warner Chilcott, a maker of brand-name drugs to treat women’s-health, gastroenterological and dermatological issues. (Actavis is headquartered in Dublin, although its executive offices are in Parsippany, N.J.) In February, Actavis announced another blockbuster acquisition: a $25 billion deal to buy Forest Laboratories, which is known for drugs that are used to treat depression, high blood pressure, fibromyalgia and other diseases.
With the mergers, Actavis’s annual revenues should reach $15 billion, up from just $3.6 billion in 2010. Analysts on average expect earnings of $13.67 per share this year, rising 22%, to $16.61 per share, in 2015. Profits will be helped in part by the low tax rate Actavis now enjoys after changing its registration to Ireland. Wall Street clearly likes Actavis’s strategy: The stock soared from $100 in the spring of 2013 to $230 by early 2014, before pulling back a bit. Ken Cacciatore, an analyst at Cowen & Co., says the stock’s leap shows that investors are “exceedingly comfortable” with the company’s finances in the near term (even with a much higher debt load). He thinks Actavis will continue to build up its brand-name drug portfolio via acquisitions, boosting the company’s ability to generate cash for shareholders in the next few years. As the market focuses on that longer-term payoff, Cacciatore says, the stock could be worth as much as $255 within 12 months.