Growth stocks will always be attractive to some. The whole prospect of buying into a company while it’s still young to rake in handsome profits after it matures is a big pull.
The goal is to make big capital gains over the years. So whichever industry or sector the company belongs to, there must be the expectation that it will grow much faster than the market. That’s what lures investors to put money into a stock that may even not earn anything at the time. The expectation is that as the company’s earnings grow, the premium paid for the shares is more than compensated. So growth stocks are primarily about future earnings, or earnings growth potential.
Of course, not all young companies will be the next Alphabet (
GOOGL Quick Quote GOOGL - Free Report) or Facebook . Some will inevitably flop because of poor product uptake by customers. And some may not be able to keep up with the required level of investments. Some (like the drug companies) could flop if the FDA doesn’t approve a candidate. So growth stocks usually come with a certain amount of risk.
That doesn’t mean that all growth stocks are young companies. The emergence of tech giants over the past two decades has shown us that it’s possible to be both big and fast-growing. So, it helps to have an open mind about the kind of stocks that would make this list.
At Zacks, we also have a Style Score system that considers all the factors contributing to the growth of a stock, based on which a grade is awarded. So when a stock gets an A or B for growth, it means that these factors are strong. Conversely, a D or F means the growth factors are weak. While not perfect (given that market fluctuations are constant), it helps to mitigate some of the inherent risk in these stocks.
As is evident from the above discussion, a growth investor is one looking for capital gains. Everyone may welcome capital gains, but it’s particularly important for growth investors because companies in the growth phase usually put back what they make into the business. They don’t normally pay a dividend. So capital appreciation is the only type of gain possible from these stocks. Significant capital gains are what makes it worthwhile to buy these stocks, especially since they are often bought at a premium.
Which is why it’s a good idea to buy them when there’s some momentum in play. Momentum investors can play both an uptrend (by buying) and a downtrend (by short selling). Since we’re talking about growth stocks to buy in this article, the selected stocks are in an uptrend with a Momentum Score of A.
So let’s see what they are-
Manhattan Associates, Inc. ( MANH Quick Quote MANH - Free Report)
Manhattan is the global leader in supply chain and omnichannel execution and optimization solutions through its warehouse, transportation, distributed order management, reverse logistics and trading partner management solutions, as well as its RFID, performance management and event management capabilities.
With COVID having created havoc in the supply chains, it’s easy to see how this Zacks Rank #2 (Buy) stock is seeing both growth and momentum (it has scored A in both).
Consequently, its President and CEO Eddie Capel has said that its second quarter results “exceeded our expectations and were strong compared to our previous all-time record in Q2 2019, preceding the COVID pandemic”.
The remaining performance obligations (RPO), a metric used to indicate future revenue potential increased 117% in the quarter, with the accelerating momentum leading management to raise the full-year guidance.
The computer software company (top 42% of more than 250 Zacks-classified industries) beat June quarter estimates by nearly 43% and the raised guidance naturally drove analysts to raise their expectations as well. So we see a 23.0% increase in the 2021 estimate and a 12.4% increase in the 2022 estimate.
The company is on track to grow revenue in both years but earnings could be down slightly next year, as costs will also increase.
TFI International Inc. ( TFII Quick Quote TFII - Free Report)
TFI provides transportation and logistics services (top 26% of Zacks ranked industries) in the United States, Canada, and Mexico. With a fleet of 7,867 tractors and 25,520 trailers, as well as arrangements with 9,926 independent contractors, it offers Package and Courier, Less-Than-Truckload (LTL), Truckload (TL), and Logistics services.
The trucking space remains very hot given soaring rates in the face of very strong demand and relatively constrained capacity. It is expected that capacity will only be added gradually because the same chip shortage that the auto industry faces is also experienced in trucks. Moreover, there is a driver shortage and driver wage inflation trend. But since it’s hard to negotiate substantial raises when the limited capacity allows companies to ask for higher rates, the whole situation is playing out in favor of truckers.
The Zacks Rank #2 company with growth and momentum scores of A, is currently expected to see double-digit growth in revenue and earnings both this year and in the next. Not only did it thrash last quarter’s expectations by 45.5%, but this also sent its 2021 and 2022 estimates soaring 19.1% and 18.4%.
ON Semiconductor Corporation ( ON Quick Quote ON - Free Report)
ON Semiconductor sells chips into the automotive and industrial markets, both of which are in the middle of a strong growth phase. Additionally, its highly differentiated power management solutions have enabled it to generate new design wins and market share gains.
Its auto customers in particular are entering into long-term supply agreements, which is improving visibility and allowing better asset allocation. On Semi is also well positioned to capitalize on the emerging EV opportunity, as well as the rapidly expanding alternative energy market (mainly solar farms).
So management expects that the record revenues generated in the last quarter will grow into more of a trend, at least through the first half of next year.
It’s also worth mentioning that this Zacks Rank #2 stocks with Growth and Momentum Scores of A, operates in the attractive Semiconductor - Analog and Mixed industry (top 13%). And we can clearly see why this is such a good place to be in right now.
As far as the numbers are concerned, I’m seeing a 45.5% beat, followed by a 29.5% increase in the 2021 estimate and a 21.2% increase in the 2022 estimate. Current estimates represent revenue and earnings growth of 25.1% and 194.1%, respectively this year, with further growth lined for next year.
Haverty Furniture Companies, Inc. ( HVT Quick Quote HVT - Free Report)
This provider of furniture and furnishings, both retail and custom-made, operates in the attractive Retail - Home Furnishings industry (top 19%).
The company’s products fall within the middle and upper-middle price ranges, where demand and sales of new home inventory has been the strongest of late. This segment also benefits from existing home sales because people generally make some changes when they move in.
Traditionally, Haverty offers a lot of custom products, but management says that people are less patient following the pandemic, often opting for what’s available at any of its 120 showrooms in 16 states in the Southern and Midwestern regions. They also check out its website.
With the supply side showing some improvement, sales are gathering momentum. And efficient cost management coupled with the increased sales is leading to strong gross margins.
The Zacks Rank #2 stock has an A for both growth and momentum.
But since there is just a single analyst providing estimates, it’s worth taking a look at his historical record. And so we see that the 83.3% earnings beat in the last quarter isn’t a one-off thing. The company has consistently topped the estimate in each of the last four quarters, averaging 85.2%. Since the analyst appears to be highly conservative, the 23.1% increase in the 2021 estimate and the 16.3% increase in the 2022 estimate is highly encouraging. Revenue and earnings are currently expected to increase a respective 35.4% and 163.3% this year, followed by additional growth in the next.
Steven Madden, Ltd. ( SHOO Quick Quote SHOO - Free Report)
Steven Madden designs, sources, markets and sells fashion-forward name brand and private label footwear for women, men and children, as well as private label fashion handbags and accessories.
This is purely a reopening story, as demand for apparel and footwear have gone through the roof in anticipation of life getting back to normal. And like some of the others, the latest quarter’s results topped pre-pandemic 2019 levels.
Both the retail and wholesale segments of the company’s business grew triple-digits in the last quarter with the company topping estimates by 6.0.0%. And Edward Rosenfeld, Chairman and CEO, commented: “Looking ahead, while the environment remains volatile, we are confident that the strength of our brands and momentum in our business position us to drive revenue and earnings growth in the back half of 2021 and beyond.”
Analysts are equally positive, going by their estimates, which represent 46.0% revenue growth and 225.0% earnings growth this year followed by 9.2% revenue growth and 16.5% earnings growth next year.
The 2021 earnings estimate is up 23.8% and the 2022 estimate is up 14.7% since then.
The shares carry a Zacks Rank #1 (Strong Buy) and value and momentum Scores of A.
Image Source: Zacks Investment Research