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Growth stocks are generally viewed as the riskier bunch because they tend to be younger, with less experienced management and more learning to do overall, both internally and externally. They’re also liable to getting swallowed up by larger rivals, which may not be such a bad thing for investors, unless the company doesn’t manage itself well, and actually gets sold for a discount.
They’re also viewed as risky because investors are attempting to put a value to future potential, which is always uncertain, but more so for companies without established business models, competitive moats and so forth.
But not all growth stocks are made alike. Take Alphabet (GOOGL - Free Report) , for example, which has grown its revenue at double-digit rates in 12 of the last 15 years, on a base of tens of billions of dollars. Obviously, people investing in this kind of stock wouldn’t have been so badly off all these years. Which goes to show that growth of this kind has an element of value in it.
Therefore, it’s possible to identify growth stocks with relatively low risk, especially at times like this, when the Fed is looking to reduce incremental rate hikes. So what if rates are likely to be up there for a few years at least, given where inflation is right now? The only way to beat those rates is still through the market.
And now that the markets have been pushed down to levels that don’t make any sense, this may be just the time to grab some growth at valuations that simply won’t be available once we’re out of this softness, or recession, or soft landing, or whatever we want to call it.
With that in mind, I’ve picked a few stocks that have done extremely well over the last couple of years and still have an attractive growth runway. It’s a cinch that they’re also going so cheap.
H&E Equipment offers industrial and construction equipment. It rents and sells around 42,725 pieces of equipment, both new and used, including things like hi-lift or aerial work platforms, cranes, and earthmoving and material handling equipment. Rented equipment is often sold off as used equipment, along with parts and other repairs and maintenance services. Most of its customers are industrial and commercial companies, construction contractors, manufacturers, public utilities, municipalities, maintenance contractors and various other industrial type of customers.
This stock caught my eye because it managed to grow its earnings at 57.5% year to date on top of the 41.4% growth in the prior year. Revenue growth has also been solid, if not as spectacular at 5.5% in 2021 and 10.3% year to date (period ending Sep 30). Results have also move ahead of 2019 (pre-pandemic) levels.
The only analyst providing estimates has been solidly beaten in the last four quarters at an average rate of 41.7%. What choice then but to keep raising earnings estimates, which are now up 48 cents (17.3%) in the last 60 days for 2022. What’s more, the 2023 estimate is up 50 cents (15.4%). Not too bad at all!
At 11.54X earnings, the shares trade at a 20.6% discount to their median value over the last five years (the Machinery Construction/Mining industry is trading at its median value). The shares also trade at a 34.0% discount to the S&P 500. Investors are clearly undervaluing its growth prospects going by the PEG ratio, which is at just 0.42.
No wonder then that this Zacks Rank #1 (Strong Buy) stock has an A for both Value and Growth (according to our Style Score system), indicating that they’re attractive for a broad range of investors.
Perion Network provides digital advertising solutions like search monetization solutions, including website monetization, search mediation and app monetization; a content monetization platform; and a cross-channel digital advertising software as a service platform to brands, agencies and publishers, primarily in North America and Europe.
Revenue and earnings have been growing strongly. In 2021, revenue grew 45.9% and earnings 112.8%. In the first three quarters of 2022, revenue is up 23.0% and earnings up 78%. With still one quarter to go, the trajectory is encouraging. Analyst growth estimates are also impressive. Revenue is expected to grow 32.2% in 2022 and earnings 115.7%. Revenue and earnings are expected to grow a respective 15.3% and 5.5% the following year.
The 12.53X P/E it trades at is a 5.1% discount to its median value over the last five years. That isn’t a lot, but it’s a 49% discount to the industry and a 28% discount to the S&P 500. Its PEG of 0.47 is also not much higher than the earlier one, which indicates gross undervaluation of its prospects.
Perion shares carry a Zacks Rank #1 and its Value and Growth Scores are B and A, respectively.
The company offers a range of design, engineering and supply chain services; electronic product manufacturing, assembly and test services; and communications infrastructure products to aerospace and defense, industrial, energy, health tech, capital equipment and original equipment manufacturers, cloud-based and other service providers, and others.
Celestica’s revenues have grown 19.3% in the first three quarters of 2022, making good the 2.2% decline in the prior year. Earnings have however grown strongly in both periods, by 36.6% and 32.3%, respectively. That growth is expected to continue in the future. Analysts are currently looking for 27.2% revenue growth and 43.1% earnings growth this year followed by 4.7% revenue growth and 6.7% earnings growth in 2023. Celestica has had no trouble beating the estimate in recent history (average rate of 11.8% in the last four quarters).
The shares are also attractive from a valuation perspective. At 5.59X earnings, they’re trading at a 36.2% discount to their median value over the last 5 years, a 68.0% discount to the S&P 500 and a 43.8% discount to the industry to which it belongs.
He shares carry a Zacks Rank #1. Value and Growth Scores are A and B, respectively.
Sociedad Química y Minera de Chile S.A. (SQM - Free Report)
Sociedad produces and distributes specialty plant nutrients (potash, nitrates, other fertilizers), iodine and its derivatives, lithium and its derivatives, potassium chloride and sulfate, industrial chemicals, and other products and services.
In the first nine months of the year, Sociedad has grown its revenue 202%, which comes on top of the 57.5% growth in 2021. Earnings growth was even stronger at 420.9% and 132.6%, respectively. Analysts are extremely optimistic about continued growth. In the current year, revenue is expected to grow 275.0% and earnings 540.5%.
In 2023, revenue is expected to grow 14.8% and earnings 17.4%. the 2022 estimate has barely changed in the last 60 days while the 2023 estimate has increased 17.6%. The company has topped estimates in three of the last four quarters at an average rate of 37.4%.
At 5.98X earnings, the shares are trading more or less in line with the industry, but at a significant discount of 72.6% to their median level over the last five years. They’re also trading at a discount of 65.8% to the S&P 500.
Sociedad carries a Zacks Rank #1 and Value and Growth Scores of B and A, respectively.
Conclusion
As can be seen from the above examples, a lot of growth stocks are now going cheap and look like value plays. One quick way to identify them is by checking the Growth and Value scores. Stocks with an A or B grade for growth and value generally have both elements. But it’s always a good idea to also look under the hood, see if recent history and analyst opinion are also positive. And finally, check that Zacks Rank, which reflects the direction and magnitude of analyst estimate revisions. And you’re set.
One-Month Price Performance
Image Source: Zacks Investment Research
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Is It Too Early to Jump into Growth Stocks?
Growth stocks are generally viewed as the riskier bunch because they tend to be younger, with less experienced management and more learning to do overall, both internally and externally. They’re also liable to getting swallowed up by larger rivals, which may not be such a bad thing for investors, unless the company doesn’t manage itself well, and actually gets sold for a discount.
They’re also viewed as risky because investors are attempting to put a value to future potential, which is always uncertain, but more so for companies without established business models, competitive moats and so forth.
But not all growth stocks are made alike. Take Alphabet (GOOGL - Free Report) , for example, which has grown its revenue at double-digit rates in 12 of the last 15 years, on a base of tens of billions of dollars. Obviously, people investing in this kind of stock wouldn’t have been so badly off all these years. Which goes to show that growth of this kind has an element of value in it.
Therefore, it’s possible to identify growth stocks with relatively low risk, especially at times like this, when the Fed is looking to reduce incremental rate hikes. So what if rates are likely to be up there for a few years at least, given where inflation is right now? The only way to beat those rates is still through the market.
And now that the markets have been pushed down to levels that don’t make any sense, this may be just the time to grab some growth at valuations that simply won’t be available once we’re out of this softness, or recession, or soft landing, or whatever we want to call it.
With that in mind, I’ve picked a few stocks that have done extremely well over the last couple of years and still have an attractive growth runway. It’s a cinch that they’re also going so cheap.
H&E Equipment Services, Inc. (HEES - Free Report)
H&E Equipment offers industrial and construction equipment. It rents and sells around 42,725 pieces of equipment, both new and used, including things like hi-lift or aerial work platforms, cranes, and earthmoving and material handling equipment. Rented equipment is often sold off as used equipment, along with parts and other repairs and maintenance services. Most of its customers are industrial and commercial companies, construction contractors, manufacturers, public utilities, municipalities, maintenance contractors and various other industrial type of customers.
This stock caught my eye because it managed to grow its earnings at 57.5% year to date on top of the 41.4% growth in the prior year. Revenue growth has also been solid, if not as spectacular at 5.5% in 2021 and 10.3% year to date (period ending Sep 30). Results have also move ahead of 2019 (pre-pandemic) levels.
The only analyst providing estimates has been solidly beaten in the last four quarters at an average rate of 41.7%. What choice then but to keep raising earnings estimates, which are now up 48 cents (17.3%) in the last 60 days for 2022. What’s more, the 2023 estimate is up 50 cents (15.4%). Not too bad at all!
At 11.54X earnings, the shares trade at a 20.6% discount to their median value over the last five years (the Machinery Construction/Mining industry is trading at its median value). The shares also trade at a 34.0% discount to the S&P 500. Investors are clearly undervaluing its growth prospects going by the PEG ratio, which is at just 0.42.
No wonder then that this Zacks Rank #1 (Strong Buy) stock has an A for both Value and Growth (according to our Style Score system), indicating that they’re attractive for a broad range of investors.
Perion Network Ltd. (PERI - Free Report)
Perion Network provides digital advertising solutions like search monetization solutions, including website monetization, search mediation and app monetization; a content monetization platform; and a cross-channel digital advertising software as a service platform to brands, agencies and publishers, primarily in North America and Europe.
Revenue and earnings have been growing strongly. In 2021, revenue grew 45.9% and earnings 112.8%. In the first three quarters of 2022, revenue is up 23.0% and earnings up 78%. With still one quarter to go, the trajectory is encouraging. Analyst growth estimates are also impressive. Revenue is expected to grow 32.2% in 2022 and earnings 115.7%. Revenue and earnings are expected to grow a respective 15.3% and 5.5% the following year.
The 12.53X P/E it trades at is a 5.1% discount to its median value over the last five years. That isn’t a lot, but it’s a 49% discount to the industry and a 28% discount to the S&P 500. Its PEG of 0.47 is also not much higher than the earlier one, which indicates gross undervaluation of its prospects.
Perion shares carry a Zacks Rank #1 and its Value and Growth Scores are B and A, respectively.
Celestica Inc. (CLS - Free Report)
The company offers a range of design, engineering and supply chain services; electronic product manufacturing, assembly and test services; and communications infrastructure products to aerospace and defense, industrial, energy, health tech, capital equipment and original equipment manufacturers, cloud-based and other service providers, and others.
Celestica’s revenues have grown 19.3% in the first three quarters of 2022, making good the 2.2% decline in the prior year. Earnings have however grown strongly in both periods, by 36.6% and 32.3%, respectively. That growth is expected to continue in the future. Analysts are currently looking for 27.2% revenue growth and 43.1% earnings growth this year followed by 4.7% revenue growth and 6.7% earnings growth in 2023. Celestica has had no trouble beating the estimate in recent history (average rate of 11.8% in the last four quarters).
The shares are also attractive from a valuation perspective. At 5.59X earnings, they’re trading at a 36.2% discount to their median value over the last 5 years, a 68.0% discount to the S&P 500 and a 43.8% discount to the industry to which it belongs.
He shares carry a Zacks Rank #1. Value and Growth Scores are A and B, respectively.
Sociedad Química y Minera de Chile S.A. (SQM - Free Report)
Sociedad produces and distributes specialty plant nutrients (potash, nitrates, other fertilizers), iodine and its derivatives, lithium and its derivatives, potassium chloride and sulfate, industrial chemicals, and other products and services.
In the first nine months of the year, Sociedad has grown its revenue 202%, which comes on top of the 57.5% growth in 2021. Earnings growth was even stronger at 420.9% and 132.6%, respectively. Analysts are extremely optimistic about continued growth. In the current year, revenue is expected to grow 275.0% and earnings 540.5%.
In 2023, revenue is expected to grow 14.8% and earnings 17.4%. the 2022 estimate has barely changed in the last 60 days while the 2023 estimate has increased 17.6%. The company has topped estimates in three of the last four quarters at an average rate of 37.4%.
At 5.98X earnings, the shares are trading more or less in line with the industry, but at a significant discount of 72.6% to their median level over the last five years. They’re also trading at a discount of 65.8% to the S&P 500.
Sociedad carries a Zacks Rank #1 and Value and Growth Scores of B and A, respectively.
Conclusion
As can be seen from the above examples, a lot of growth stocks are now going cheap and look like value plays. One quick way to identify them is by checking the Growth and Value scores. Stocks with an A or B grade for growth and value generally have both elements. But it’s always a good idea to also look under the hood, see if recent history and analyst opinion are also positive. And finally, check that Zacks Rank, which reflects the direction and magnitude of analyst estimate revisions. And you’re set.
One-Month Price Performance
Image Source: Zacks Investment Research