TXN - My Top 10 Growth Companies To Invest In April 2023

2023-04-06 14:00:00 ET

Summary

• In this article, I will introduce you to 10 growth companies which I currently consider to be attractive.
• The selected picks have shown significant growth over the past years and all of them are in strong financial health.
• In addition to that, all the picks have strong competitive advantages and their Valuation is currently not extraordinarily high.

Investment Thesis

In a previous article for Seeking Alpha, I wrote about my top 10 high dividend yield companies to invest in for April 2023. Today, I will present ten growth companies that I currently consider to be attractive. All of these companies fulfill a large number of requirements that I will describe in more detail throughout the article.

However, you should be aware of the risk factors associated with these growth stocks. Although my filtering process eliminates unprofitable companies and those with extremely high Valuations, some of the picks still don’t have a low Valuation.

A high Valuation of a company is an indicator of high growth expectations. If a company was unable to meet these expectations, it could result in the share price declining significantly, thus representing an important risk factor for investors.

For this reason, in order to limit your portfolio risk, I would recommend that you don't invest in these companies for the short term and also to limit the percentage of growth companies in your overall portfolio. In the following, I will describe the selection process for my top 10 growth companies to invest in for April 2023.

First step of the Selection Process: Analysis of the Financial Ratios

In order to identify attractive growth companies, I have used a filter process to make a pre-selection. From this pre-selection, I then select my top 10 growth companies of the month. The companies should fulfill the following requirements in order to become part of the pre-selection:

• Market Capitalization > $10B
• P/E [FWD] Ratio < 100
• Average Revenue Growth Rate over the past 3 years > 8%
• Average EBITDA Growth Rate over the past 3 years > 8%
• EBIT Margin [TTM] > 0%
• Moody’s credit rating: at least B

You may wonder why the highest possible P/E [FWD] Ratio should be below 100 when selecting attractive growth companies. If this maximum P/E Ratio was significantly lower, it would lead to the exclusion of companies that have historically had a very high P/E Ratio, and could still turn out to be excellent long-term investments. An example would be Amazon (NASDAQ: AMZN ), which has shown an Average P/E [FWD] Ratio of 194.07 over the last 5 years. Nevertheless, the Valuation of the majority of the final selected companies is well below this P/E [FWD] Ratio of 100.

The Average Revenue Growth Rate and EBITDA Growth Rate of more than 8% contribute to only selecting companies that have shown significant growth within the past years and therefore justify their designation as a growth stock.

An EBIT Margin of more than 0% helps to only select those growth stocks that are profitable. This contributes to reducing the risk level of your investment and to decrease the probability of losing the money you invest. The Moody's credit rating of at least B should also help reduce your investment risk.

The second, third and fourth steps are the same steps I have already described in my previous article on the selection of dividend growth companies.

Readers who are already familiar with this from my previous analysis can skip steps 2, 3 and 4 of the selection process, which are written below in italics. I have included the steps again for new readers who are not yet familiar with my selection process.

Second step of the selection process: Analysis of the Competitive Advantages

In a second step, the companies’ competitive advantages (for example: brand image, innovation, technology, economies of scale, etc.) are analyzed in order to make an even narrower selection. I consider it to be particularly important for companies to have strong competitive advantages in order to stand out against the competition in the long term. Companies without strong competitive advantages have a higher probability of going bankrupt one day, thus representing a strong risk for investors to lose their invested money.

Third step of the selection process: The Valuation of the companies

In the third step of the selection process, I will dive deeper into the Valuation of the companies.

In order to conduct the Valuation process, I use different methods and criteria, for example, the companies’ current Valuation as according to my DCF Model, the expected compound annual rate of return as according to my DCF Model and/or a deeper analysis of the companies’ P/E [FWD] Ratio. These metrics should serve as an additional filter to only select companies that currently have an attractive Valuation, which helps you to identify companies that are at least fairly valued.

The Fourth and final step of the selection process: Diversification over Industries and Countries

In the fourth and final step of the selection process, I have established the following rules for choosing my top picks: in order to help you diversify your investment portfolio, a maximum of two companies should be from the same industry. In addition to that, there should be at least one pick that is from a company that is based outside of the United States, serving as an additional geographical diversification.

My Top 10 Growth Stocks to Invest in for April 2023

The 10 selected companies:

• Accenture (NYSE: ACN )
• Adobe (NASDAQ: ADBE )
• Alphabet (NASDAQ: GOOG ) (NASDAQ: GOOGL )
• Amazon
• Broadcom (NASDAQ: AVGO )
• Danaher (NYSE: DHR )
• S&P Global (NYSE: SPGI )
• Salesforce (NYSE: CRM )
• Tesla (NASDAQ: TSLA )
• UnitedHealth (NYSE: UNH )

Source: Seeking Alpha

Accenture

Accenture is an IT consulting company based in Dublin, Ireland, which was founded in 1951.

Accenture’s Net Income Margin [TTM] of 10.99% stands 305.89% above the Sector Median (which is 2.71%) and the company’s Return on Equity of 31.31% lies 1,081.25% above the Sector Median of 2.65%. Both metrics serve to emphasize Accenture’s strong financials.

The company has shown an Average Revenue Growth Rate [FWD] of 9.29% over the past 5 years and an EBIT Growth Rate [FWD] of 10.26% over the same time period. Accenture’s Growth metrics were a key factor in the company being selected as one of my favorite growth companies to invest in during this month of April.

The Seeking Alpha Dividend Grades further demonstrate that Accenture is not only an attractive pick in terms of Growth, but that it also pays shareholders an appealing Dividend. The company is rated with an A+ in terms of Dividend Growth and an A- for Dividend Safety. For Dividend Consistency, the company gets a B.

Adobe

Adobe is a global and diversified software company. The company operates through the following segments :

• Digital Media
• Digital Experience
• Publishing and Advertising

Adobe was founded in 1982 and currently has a Market Capitalization of $175.18B.

Adobe’s EBIT Margin [TTM] of 33.91% is proof of its strong competitive position within the Application Software Industry.

The company has shown excellent results when it comes to Growth, which I will show in the following: Adobe’s Average Revenue Growth has been 18.30% over the past 5 years and its Average Free Cash Flow Per Share Growth Rate [FWD] has been 20.39% over the same period. Both metrics strengthen my theory to make Adobe part of this list of growth stocks to invest in for the month of April 2023.

Even though the company’s Valuation is not extraordinarily low (the company has a P/E [FWD] Ratio of 34.29), its P/E [FWD] Ratio is still 26.29% below its Average P/E [FWD] Ratio from over the past 5 years (which is 46.52). These numbers indicate that the company is currently undervalued and strengthen my confidence to rate it currently as a buy.

Adobe has an excellent position as according to the Seeking Alpha Quant Ranking, which further underlines my investment thesis. The company is ranked 12 ^th out of 214 within the Application Software Industry and 33 ^rd out of 596 within the Information Technology Sector. In the overall ranking, the company sits in 184 ^th place (out of 4732).

Alphabet

I consider Alphabet to be one of the top picks from my list of growth stocks to invest in for April 2023. The reasons for this are numerous.

In my opinion, Alphabet currently has a very attractive Valuation: the company’s P/E [FWD] Ratio of 19.74 stands 26.34% below its Average from over the past 5 years (which is 26.80). Furthermore, the company’s Price / Sales [TTM] Ratio of 4.66 lies 27.37% below its Average from the past 5 years (6.42). This further underlines my theory that the company’s Valuation is very attractive at this moment in time.

I would also like to highlight that Alphabet’s P/E [FWD] Ratio of 19.74 is below the one of competitors such as Meta (NASDAQ: META ) (P/E [FWD] Ratio of 21.55), Apple (NASDAQ: AAPL ) (27.56) and Microsoft (NASDAQ: MSFT ) (31.20), and clearly below the one of Amazon (77.12).

Several metrics also confirm Alphabet’s excellent growth prospects: the company has shown an Average Revenue Growth Rate [FWD] of 19.23% over the past 5 years and its Average EPS Diluted Growth Rate [FWD] has been 24.81% over the same time period, underlying the company’s strength in terms of Growth.

The Seeking Alpha Quant Ranking further confirms that Alphabet is an excellent pick within its sector and industry: the company is currently ranked 4 ^th out of 63 within the Interactive Media and Services Industry and 11 ^th out of 253 within the Communication Services Sector. In the overall ranking, the company is 221 ^st out of 4732.

Amazon

It is true that Amazon’s Valuation is not particularly low, but its P/E Non-GAAP [FWD] Ratio of 71.77 lies 63.02% below its Average from over the past 5 years, suggesting that the company is currently attractive.

When compared to other competitors from the Broadline Retail Industry, it can be highlighted that Amazon’s Valuation is lower than the one of MercadoLibre (NASDAQ: MELI ) (P/E GAAP [FWD] Ratio of 81.26), but significantly above the one of Alibaba (NYSE: BABA ) (P/E GAAP [FWD] of 27.62) or JD.com (NASDAQ: JD ) (24.44). However, from my perspective, Amazon deserves a significant premium when compared to those competitors, particularly since I consider the risks of investing in Amazon to be significantly lower.

The company’s strength in terms of Growth can be underlined by its Revenue Growth Rate [FWD] of 10.24% as well as its Average Revenue Growth Rate [FWD] of 22.17% from over the past 5 years. The same is shown when having a look at its EBIT Growth [FWD] of 9.86% and its Average EBIT Growth Rate [FWD] over the past 5 years of 40.80%.

The company’s continuous focus on innovation and customer satisfaction in combination with the strong brand image it has managed to establish, provides Amazon with strong competitive advantages and a wide economic moat, thus suggesting that the company should become an excellent long-term investment.

In the graphic below you can see that Amazon has managed to outperform the S&P 500 over the past 10 years: while the S&P 500 has shown a Total Return of 220.51% over the past 10 years, Amazon’s Total Return has been 710.50%. Due to Amazon’s strong competitive advantages, I believe the company could be able to continue outperforming the index in the years ahead.

Broadcom

Broadcom is a U.S. based company from the Semiconductors Industry that was founded in 2018. The company currently has a Market Capitalization of $264.23B.

Due to its P/E [FWD] Ratio of 18.68% standing 42.99% below its Average from the past 5 years (which is 32.76), I consider the company’s Valuation to currently be attractive. Additionally, its current P/E [FWD] Ratio lies 26.80% below the Sector Median, which further strengthens my confidence that the company is currently undervalued. Moreover, its Price / Cash Flow [TTM] Ratio of 15.47 is 26.15% below the Sector Median (20.95), once again reinforcing my theory that the company is undervalued at this moment of writing.

With a P/E GAAP [FWD] Ratio of 18.90, Broadcom’s Valuation is currently slightly below the one of Texas Instruments (NASDAQ: TXN ) (P/E GAAP [FWD] Ratio of 24.34) and significantly below the one of Advanced Micro Devices (NASDAQ: AMD ) (116.36). However, its Valuation is above that of QUALCOMM (NASDAQ: QCOM ) (16.39).

The Seeking Alpha Dividend Grades demonstrate that Broadcom is not only an attractive growth company, but that it's also an excellent choice for investors seeking Dividend Income and Dividend Growth. The company is rated with an A+ for Dividend Safety and Dividend Growth. In terms of Dividend Yield, it gets an A and for Dividend Consistency, a B+.

Danaher

Danaher is a company from the Life Sciences Tools and Services Industry that has 80,000 employees. The company is based in Washington and was founded back in 1969. Danaher’s Market Capitalization is currently at $183.76B.

The company currently has a P/E [FWD] Ratio of 29.92 which is 15.09% below its Average from over the past 5 years.

Danaher is highly profitable, which is underlined by its EBITDA Margin [TTM] of 34.84%, standing 1,179.79% above the Sector Median of 2.72%. Its financial strength can be further confirmed by looking at the Seeking Alpha Profitability Grade for the company, which you can find below.

On top of that, it can be highlighted that the company has shown an Average Revenue Growth Rate [FWD] of 10.26% over the past 5 years and an Average EBIT Growth Rate [FWD] of 18.53% over the same time period, suggesting that it’s an excellent fit in terms of Growth.

S&P Global

S&P Global is a company from the Financial Exchanges and Data Industry that was founded in 1860. The company currently has 39,950 employees and a Market Capitalization of $110.60B. S&P Global operates through the following segments:

• S&P Global Ratings
• S&P Dow Jones Indices
• S&P Global Commodity Insights
• S&P Global Market Intelligence
• S&P Global Mobility
• S&P Global Engineering Solutions

The company has an excellent competitive position within its Industry. This is underlined by its EBIT Margin [TTM] of 35.45%, which stands 59.85% above the Sector Median of 22.18%. Its Return on Equity of 16.91% (which stands 51.67% above the Sector Median) further underlines its enormous Profitability.

In terms of Growth, S&P Global has shown strong results: the company’s Average Revenue Growth Rate over the past 5 years is 9.45% and its EBIT Growth Rate [FWD] over the same time period is even higher (11.12%).

However, the company’s relatively high P/E [FWD] Ratio of 36.35 indicates that high growth expectations are priced into the stock. With that in mind, you should be aware that the stock price could drop significantly over the short term if growth expectations are not met.

S&P Global’s Valuation is below the one of competitors such as Moody's (NYSE: MCO ) (P/E [FWD] Ratio of 36.79) and MSCI (NYSE: MSCI ) (45.49). However, it is slightly above the one of London Stock Exchange Group ( OTCPK:LNSTY ) (27.94).

Salesforce

Salesforce is a San Francisco based company from the Application Software Industry that develops Customer Relationship Management ('CRM') technology. The company was founded in 1999 and currently has a Market Capitalization of $199.78B.

When it comes to Growth, Salesforce has shown excellent results: the company’s Free Cash Flow Per Share Growth Rate [FWD] of 23.17% stands 129.66% above the Sector Median. Its EPS Diluted Growth Rate [FWD] of 22.19% also lies above the Sector Median (by 113.60%), indicating that the company is ahead of its competitors when it comes to Growth.

Salesforce’s strength in terms of Growth is further confirmed when comparing the company with its competitors in the Information Technology Sector. When comparing it to Microsoft, for example, it can be highlighted that Salesforce’s Revenue 5 Year [CAGR] of 24.36% and its EBIT 3 Year [CAGR] of 58.91% are significantly above the one of its competitor (14.82% and 19.24% respectively).

The Seeking Alpha Quant Ranking confirms Salesforce’s excellent position within its Industry, since the company is ranked 4 ^th out of 214 within the Application Software Industry and 12 ^th out of 596 within the Information Technology Sector. In the overall ranking, the company placed 39 ^th out of 4732.

Salesforce’s current P/E Non-GAAP [FWD] Ratio stands at 28.03, which lies 47.10% below its Average over the past 5 years, indicating that the company is currently undervalued.

Tesla

At this moment in time, Tesla shows a relatively attractive Valuation: with a P/E Non-GAAP [FWD] Ratio of 52.17, the company’s Valuation is significantly below its Average P/E Non-GAAP [FWD] Ratio for over the past 5 years, which is 127.19. The company’s current P/E [FWD] Ratio lies 58.98% below its Average over the same time period.

In terms of Growth, Tesla is superior to its peer group, which can be confirmed by having a look at the following metrics: Tesla’s Revenue Growth Rate [FWD] of 35.50% stands 385.58% above the Sector Median of 7.31%. In addition to that, the company’s EBIT Growth [FWD] of 49.26% lies 1,325.10% above the Sector Median of 3.46%, once again underlying Tesla's strength in terms of Growth.

When it comes to Profitability, Tesla also shows excellent results: its EBIT Margin [TTM] of 16.81% stands 116.22% above the Sector Median of 7.77%, which can be interpreted as a clear indicator of Tesla’s strong position within its industry. The company also has a superior Return on Equity to its peer group: while Tesla has a Return on Equity [TTM] of 33.60%, the same is 11.79% for the Sector Median.

However, you should be aware that Tesla’s Valuation is still much higher than the one of competitors such as Ford (NYSE: F ) or General Motors (NYSE: GM ): while Ford currently has a P/E GAAP [FWD] Ratio of 7.78, General Motor’s is 6.24. These numbers confirm that high growth expectations are still priced in the Tesla stock, indicating that the risks associated with an investment in the company are relatively high.

UnitedHealth Group

UnitedHealth Group is a company from the Managed Health Care Industry that was founded in 1977. It is based in Minnetonka and currently has 400,000 employees and a Market Capitalization of $440.85B.

Both the Seeking Alpha Analysts and the Wall Street Analysts currently rate the company as a buy, which underlines my own buy rating.

The company’s Return on Equity of 26.91% and its EBITDA Margin [TTM] of 9.51% demonstrate that the company has a strong Profitability.

UnitedHealth Group's EBITDA Growth Rate [FWD] of 13.68% stands 100.30% above the Sector Median. Its EPS Diluted Growth Rate [FWD] of 14.18% lies 140.62% above the Sector Median of 5.89%, thus strengthening my confidence that the company is an excellent pick in terms of Growth.

When it comes to Valuation, it can be highlighted that its P/E GAAP [FWD] Ratio of 19.96 stands 28.38% below the Sector Median, which indicates that the company is currently undervalued.

Conclusion

The objective of today’s article was to present you with my top 10 growth companies that I consider worth investing in for April 2023.

As well as having strong competitive advantages, all of the 10 picks have shown significant growth in recent years. On top of that, they are all profitable and have a credit rating by Moody’s of at least B, thus significantly reducing the level of risk. This reduction of risk increases the probability of making an excellent investment decision over the long term.

However, due to the higher risk level that comes attached to growth stocks in general, I would suggest to limit the number of growth stocks on your overall portfolio.

Author’s Note: I would love to hear your opinion on this selection of growth companies. Do you already own or plan to buy some of the listed companies? Which are currently your favorite growth stocks to invest in this month?

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