2023-07-25 15:00:00 ET
Summary
- I will introduce you to 10 growth companies that could help to increase the Total Return of your investment portfolio.
- However, you should have in mind that growth companies often come attached to a relatively high risk-level.
- I believe that 2 out of these 10 picks are currently particularly attractive for investors, due to their low Valuation, financial health, competitive advantages, and their growth perspective.
Investment Thesis
Growth companies can help you increase the Total Return of your overall investment portfolio.
However, you should be aware of the risk factors that often come attached to an investment in growth companies, particularly when high growth expectations are priced into the companies' stock prices. A high Valuation of a company can result in a significant decline of its stock price if growth expectations are not met, which as a consequence can have a strong negative impact on the Total Return of your overall investment portfolio.
For this reason, I generally suggest to limit the number of growth companies in relation to your overall investment portfolio. Moreover, I generally suggest not to overweight those growth companies that have a particularly high Valuation. By doing so, you can reduce the downside risk of your investment portfolio and increase the probability of achieving attractive investment results over the long term.
In this article, I will introduce you to 10 growth companies which I believe are currently attractive in terms of risk and reward and which could contribute to increasing the Total Return of your investment portfolio. This list only includes companies that currently do not pay a Dividend.
Below you can find the selection process of the 10 growth companies that I have selected for the month of July. I described this process in a previous article . So, if you are already familiar with this process, you can skip the following description written in italics.
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 fulfil the following requirements in order to become part of the pre-selection:
- Market Capitalization > $5B.
- P/E [FWD] Ratio < 100.
- Average Revenue Growth Rate over the past 3 years > 6% [changed from 8%].
- Average EBITDA Growth Rate over the past 3 years > 6% [changed from 8%].
- EBIT Margin [TTM] > 0% or Net Income Margin [TTM] > 0.
You may wonder why the P/E [FWD] Ratio should not 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 ( 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 6% [changed from 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.
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.
New Companies compared to the previous month
- GoDaddy ( GDDY ).
- Fiserv ( FI ).
- Meta ( META ).
- B3 S.A. ( OTCPK:BOLSY ).
My Top 10 Growth Companies to Invest in for July 2023
- Adobe ( ADBE ).
- Alphabet ( GOOG ) ( GOOGL ).
- Amazon ( AMZN ).
- B3 S.A.
- Fiserv.
- GoDaddy.
- Meta.
- PayPal ( PYPL ).
- T-Mobile ( TMUS ).
- Tesla ( TSLA ).
Overview of the Selected Growth Companies for July 2023
Company Name | Adobe | Alphabet | Amazon | PayPal Holdings | T-Mobile | Tesla | GoDaddy | Fiserv | Meta Platforms | B3 S.A. |
Sector | Information Technology | Communication Services | Consumer Discretionary | Financials | Communication Services | Consumer Discretionary | Information Technology | Financials | Communication Services | Financials |
Industry | Application Software | Interactive Media and Services | Broadline Retail | Transaction & Payment Processing Services | Wireless Telecommunication Services | Automobile Manufacturers | Internet Services and Infrastructure | Transaction & Payment Processing Services | Interactive Media and Services | Financial Exchanges and Data |
P/E GAAP [FWD] | 47.33 | 23.09 | 83.65 | 22.17 | 19.39 | 97.64 | 32.06 | 28.36 | 26.19 | 22.04 |
Revenue Growth [FWD] | 11.12% | 9.06% | 10.09% | 8.31% | 0.89% | 34.11% | 6.57% | 6.13% | 6.01% | 5.58% |
Revenue 3 Year [CAGR] | 15.23% | 19.53% | 21.00% | 15.41% | 20.65% | 48.97% | 10.34% | 13.37% | 16.95% | 11.90% |
Source: The Author, data from Seeking Alpha
Adobe
Similar to other growth companies, Adobe's Valuation is currently not low. Its current P/E [FWD] Ratio stands at 46.88, being 2.03% above its Average from the past 5 years. This makes me believe that the company is fairly valued.
However, you should be aware of the fact that the company's current P/E [FWD] Ratio stands significantly above the Sector Median of 26.24. Due to Adobe's high Valuation, I would not overweight the company in an investment portfolio in case you decide to include it.
Among the company's competitive advantages are its broad product portfolio, its cloud-based services as well as its ecosystem and customer loyalty.
At this moment in time, the company has an excellent position within the Seeking Alpha Quant Ranking: Adobe is ranked 5th (out of 204) within the Application Software Industry, 11th (out of 583) within the Information Technology Sector, and 54th out of 4675 within the Overall Ranking. These results indicate that the company is an excellent choice for investors at this moment in time.
Source: Seeking Alpha
Alphabet
At Alphabet's current share price of $123, the company has a Free Cash Flow Yield [TTM] of 3.88%, serving as an indicator that its investors can benefit from an investment without the need for the company to fulfill particularly high growth expectations. Alphabet's Free Cash Flow Yield also indicates that the company is an appealing risk/reward choice for investors.
Moreover, I continue believing that Alphabet is an excellent pick in terms of growth: the company has a Free Cash Flow Per Share Growth Rate [FWD] of 7.73%, which lies 107.50% above the Sector Median and demonstrates that it has been able to increase its Free Cash Flow at an attractive rate.
The company's P/E GAAP [FWD] Ratio is currently at 22.89. This Ratio lies 13.96% below its 5 Year Average, evidencing that Alphabet is currently undervalued.
Alphabet's current Valuation is below that of Meta (P/E [FWD] Ratio of 26.51) and significantly lower than that of Microsoft ( MSFT ) (P/E [FWD] Ratio of 36.13), further indicating that Alphabet is currently undervalued.
According to the Seeking Alpha Quant Ranking, Alphabet holds an excellent position, supporting my own buy rating for the company: Alphabet is placed 2nd out of 62 within the Interactive Media and Services Industry, 2nd out of 250 within the Communication Services Sector and 43rd out of 4675 within the Overall Ranking.
Source: Seeking Alpha
Amazon
Amazon was founded in 1994 and the company operates through the following business segments:
- North America.
- International.
- and Amazon Web Services (AWS).
I believe that Amazon continues to be a great pick for investors, particularly when considering the company's growth track record and its growth perspective. Amazon has a Revenue Growth Rate [FWD] of 10.11% and an EBIT Growth [FWD] of 11.05%, which both stand significantly above the Sector Median (6.83% and 3.38% respectively).
When it comes to Valuation, it should be highlighted that the company currently has a significantly lower P/E Non-GAAP [FWD] Ratio than it has had on Average over the past 5 years: while the company's current P/E Non-GAAP [FWD] Ratio stands at 85.22, it has been 189.84 on Average over the past 5 years. This number demonstrates that Amazon is undervalued.
However, it should be stated that the company's Valuation is still high and that it's significantly above the Sector Median (15.78). Amazon's high Valuation is an indicator that an investment in the company comes along with an elevated risk level. This would particularly be the case if the company was not able to meet its growth targets in the future, which could result in its stock price declining significantly.
According to the Wall Street Ratings, Amazon is currently a strong buy: the company is rated with a strong buy from 37 analysts and with a buy from 13 analysts. Only four analysts rate the company as a hold, and one analyst as a sell. The Wall Street Ratings reinforce my own buy rating for the company.
B3 S.A.
B3 S.A. is a Brazilian financial market infrastructure company. The company was founded in 2007 and currently has a Market Capitalization of $17.60B.
B3 S.A. has shown attractive results in terms of growth, evidenced by its Revenue Growth Rate [FWD] of 5.84% and its Free Cash Flow Per Share Growth Rate [FWD] of 27.65%.
I believe that the company possesses formidable competitive advantages, to which I count its market dominance as Brazil's primary stock exchange, its diverse product portfolio and its focus on innovation.
The company's leading market position is also reflected in its high EBIT Margin [TTM] of 61.70%, which lies significantly above the Sector Median of 20.44%.
Below you can find the Seeking Alpha Profitability Grade, which strongly underlines the company's leading position within its business segment.
Nevertheless, due to the elevated risk factors (such as macroeconomic and currency risk factors) that come attached to an investment in B3 S.A., I suggest underweighting the company in an investment portfolio.
Fiserv
Fiserv provides global payment and financial services technology. The company was founded in 1984 and currently has a Market Capitalization of $79.83B.
Different metrics underline the company's strength when it comes to growth: Fiserv has shown an EPS Diluted Growth [YoY] of 48.01%, which lies significantly above the Sector Median of -2.04%. In addition to that, it is worth mentioning that the company has shown an ROE Growth Rate [YoY] of 44.32%, which is also well above the Sector Median (-4.71%).
I believe that the company also exhibits robust Profitability, which is evidenced by its high EBITDA Margin [TTM] of 39.09%.
According to the Wall Street Ratings, the company is currently a buy: 17 analysts rate the company as a strong buy, while 8 analysts rate it as a buy. From 11 analysts the company receives a hold rating. These Wall Street Ratings support my own buy rating for the company.
GoDaddy
GoDaddy designs and develops cloud-based products. The company was founded in 2014 and currently has 6,875 employees. Its Market Capitalization is currently at $12.07B.
I believe that the company is undervalued at this moment in time: its current P/E Non-GAAP [FWD] Ratio stands at 14.26, which is well below the Sector Median of 24.36 and significantly below its Average from the past 5 Years (61.56).
Furthermore, it is worth mentioning that GoDaddy has shown excellent results when it comes to growth: the company has an EBIT Growth Rate [FWD] of 21.97%, which lies 100.63% above the Sector Median and supports the theory that it's an attractive choice for investors in terms of growth.
The Seeking Alpha Factor Grades support my investment thesis that GoDaddy is currently attractive for investors looking to include growth companies in their investment portfolio: the company is rated with an A rating in terms of Growth and Profitability. For Valuation, it gets a C+, and for Momentum and Revisions, the company receives a C-.
Meta
Meta currently has a P/E [FWD] Ratio of 26.51 and I believe that the company is fairly valued at its current price levels since it stands just 12.94% above its Average from the past 5 years.
Even though I would not overweight the company in a long-term investment portfolio, I definitely think it is worth including it in an investment portfolio with a small position.
The company exhibits a robust Profitability, which is reflected in its Gross Profit Margin [TTM] of 79.58% and its Return on Common Equity [TTM] of 17.92% (both metrics stand significantly over the Sector Median).
It is also worth highlighting that Meta is currently in first place of the Seeking Alpha Quant Ranking. The current Seeking Alpha Quant Ranking has also contributed to me including the company in this list of growth companies to consider investing in for July.
Source: Seeking Alpha
According to the Wall Street Ratings, the company is a buy: 32 analysts rate Meta as a strong buy while 12 analysts rate it as a buy.
PayPal
Taking into account the past 5-year period, PayPal is still down -15.06%. The company currently has a P/E [FWD] Ratio of 22.13, which lies significantly below its Average from over the past 5 years (55.44). This comparison supports my theory that PayPal is undervalued at this moment in time.
Even though the company has lately shown significantly lower Growth Rates than in the years before, PayPal continues to be an appealing growth company from my point of view: its EBIT Growth Rate [YoY] stands at 12.44%, which is significantly above the Sector Median of 6.71%. PayPal's strength in terms of growth is further evidenced by its Free Cash Flow Per Share Growth Rate [FWD] of 8.24%, which lies 20.62% above the Sector Median.
The Seeking Alpha Quant Ranking also confirms the company's attractiveness compared to its peer group: PayPal is ranked 4th out of 42 within the Transaction & Payments Processing Services Industry and 67th out of 702 within the Financials Sector. In the Overall Ranking, the company is placed 488th out of 4675.
Source: Seeking Alpha
Tesla
At this moment in time, Tesla's Market Capitalization stands at $923.15B and the company has a P/E GAAP [FWD] Ratio of 94.87.
Tesla's Valuation is still extremely high and therefore I continue to suggest giving the company a small percentage of your overall portfolio in case you decide to include it. This strategy helps you benefit from the company's growth perspective, while, at the same time, limiting the downside risk of your investment portfolio. I suggest to give Tesla a maximum of 3% of your total investment portfolio.
I believe that Tesla has strong competitive advantages, to which I count its brand image and enormous customer loyalty in combination with its own ecosystem, its battery technology and continuous focus on innovation.
In terms of growth, Tesla continues to show impressive results: the company has an EPS Diluted Growth Rate [FWD] of 42.27%, which is significantly above the Sector Median of 2.41%.
Below you can find the Seeking Alpha Growth Grade for the company, which has contributed to me including Tesla in this list of growth companies to consider investing in for this month of July.
T-Mobile
T-Mobile is a company from the Wireless Telecommunication Services Industry that was founded in 1994. The company has 71,000 employees and currently a Market Capitalization of $165.08B.
I believe that T-Mobile is undervalued at this moment of writing, since its P/E [FWD] Ratio of 19.27 lies 52.33% below its Average from the past 5 years.
The company's current Valuation is even more attractive when taking into account its growth track record and growth perspective: T-Mobile has shown an EBIT Growth Rate [FWD] of 38.00%, indicating that the company has been able to increase its earnings to a significant amount.
In addition to the above, it is worth mentioning that T-Mobile is clearly ahead of competitors such as Verizon (NYSE: VZ ) and AT&T (NYSE: T ) when it comes to Growth: while T-Mobile has a Revenue Growth Rate 3 Year [CAGR] of 20.65% and an EBIT Growth Rate 3 Year [CAGR] of 27.35%, Verizon's are 1.21% and -0.69% respectively while AT&T's are -12.22% and -0.40% respectively.
In terms of Profitability, T-Mobile also seems to be an excellent choice, since its EBITDA Margin [TTM] of 33.89% lies well above the Sector Median of 18.05%.
Below you can find the Seeking Alpha Profitability Grade, which further demonstrates the company's strength when it comes to Profitability.
Conclusion
Generally, growth companies come attached to a higher risk level for investors, especially when high growth expectations are priced into the companies' stock prices. Therefore, I suggest to limit the number of growth companies on your total investment portfolio, particularly those with a high Valuation. By limiting them, you reduce the downside risk of your investment portfolio.
However, there are growth companies that have a lower Valuation and therefore come attached to a lower risk level, offering investors a better risk/reward proposition: Alphabet and PayPal are two examples of growth companies that I believe are currently particularly attractive for investors due to their growth perspective, their currently relatively low Valuation (while Alphabet has a P/E [FWD] Ratio of 22.89, PayPal's is 22.13) in addition to having strong competitive advantages. I also believe that an investment in these companies comes along with a relatively low risk level, helping you to increase the probability of obtaining attractive investment results over the long term.
Author's Note: I would appreciate 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?
For further details see:
My Top 10 Growth Companies For July 2023