Image source: Pixabay.
With the stock market in nearly nonstop rally mode during the past six years, investors haven't needed to look far to uncover an abundance of growth stocks. But not all growth stocks are created equal: While some could still deliver extraordinary gains, others appear considerably overvalued, and might instead burden investors with hefty losses.
What exactly is a growth stock? Though it's arbitrary, I'll define a growth stock as any company forecast to grow profits by 10% or more annually during the next five years. To decide what's "cheap," I'll use the PEG ratio, which compares a company's price-to-earnings ratio to its future growth rate. Any figure around or below one could signal a cheap stock.
Here are three companies that fit the bill.
Ligand Pharmaceuticals (LGND 1.38%)
This week, we'll begin in the biotech sector with a company that's far from traditional, Ligand Pharmaceuticals. Whereas most biotech companies run the gauntlet of discovering, testing, and marketing a drug over what can be a process that takes around a decade to evolve, Ligand's approach is far simpler. It intends to acquire royalty assets, and then use a low-cost structure with minimal overhead to profit. The big concern with this strategy is that, once the patents run out, it will need to search elsewhere for revenue; but for the time being, that's a long way off.
Image source: Ligand Pharmaceuticals.
Ligand's bread-and-butter technology is Captisol, which helps improve the solubility and stability of select drugs. Every time a drug using Ligand's technology is sold, it garners a small percentage of revenue. Some of these partnered products include Amgen's multiple myeloma drug Kyprolis, which had its label expanded to treat second-line patients this summer, Novartis' Promacta for idiopathic thrombocytopenic purpura, and Zoetis' Cerenia, an animal-health product used to prevent vomiting and motion sickness.
One thing you'll want to keep in mind is that Ligand's current P/E is a little bit deceiving. The company had been carrying more than $700 million in net operating loss carryforwards based on a combination of operations and acquisitions throughout the years. Ligand wound up recognizing that loss, and taking a $217.3 million tax benefit during the third quarter.
Despite the perfectly legal tax tomfoolery, Ligand is projected to grow its full-year EPS from a reported $1.52 in 2014 to well over $7 by 2018. Its forward P/E of nearly 30 might look a bit scary, but inclusive of its royalty growth prospects, its PEG ratio of 0.7 implies this is a cheap growth stock worthy of your attention.
Penske Automotive Group (PAG 0.48%)
Next, we'll turn our attention to retail automotive and heavy-duty vehicle dealership operator Penske Automotive Group.
Penske's a bit of an odd case. The stock is very close to a 52-week low because Wall Street can't get over the weakness in the commercial-vehicle market. Commercial vehicles have been affected by the adverse effects of currency translation in foreign markets -- 39% of Penske's total sales, from all operating groups, came from overseas markets in the third quarter -- weaker commodity prices, and sluggish demand, which have negatively affected pricing. But Wall Street and investors are overlooking one major point – commercial vehicles only account for 8% of Penske's total sales.
Image source: Penske Automotive Group.
Looking at the larger picture, the retail automotive business, which comprises 83% of total sales, is humming along nicely. Penske's success has been tied with its reliance on luxury dealerships, such as Audi and Mercedes-Benz. A more affluent clientele is less likely to be affected by minute changes in interest rates or economic hiccups, thus putting Penske in the driver's seat to growing profits. In the third quarter, retail revenue rose 5.2%, and if currency moves are excluded, this figure rises to 8.5%, with 17.2% operational growth in international markets.
With some forecasts calling for 18 million-plus auto sales in the U.S. on an annual basis in the coming years, Penske looks poised to profit. With its PEG ratio of around one, EPS growth of roughly 10% to 13% on a year-over-year basis through 2018, and a yield above 2%, this cheap growth stock could drive your portfolio to substantial gains.
Jabil Circuit (JBL -0.16%)
Jabil Circuit has two major business components -- electronic manufacturing services and diversified manufacturing services, which covers assembly, machining, and automation services -- but all Wall Street and investors seem to care about is its tied-to-the-hip relationship with Apple (AAPL -1.85%).
Image source: Pixabay.
Jabil Circuit is the manufacturer behind a number of iPhone cases, and the last time I checked, Apple was forecast to sell in excess of 200 million iPhone's for many years to come. Apple's operating system may trail the Android OS by a mile globally in terms of market share, but when it comes to the smartphone device itself, Apple's cult-like following is unparalleled, and that's generally good news for Jabil. When Apple introduces a new device, and that device trounces Wall Street's estimates, it reflects well on Jabil (and vice versa, when Apple cuts its often-conservative iPhone sale estimates.
But there's more to like about Jabil than just its relationship with Apple (which has accounted for around a quarter of its year-to-date revenue). Jabil has the opportunity to offset any fluctuations in revenue from Apple with order growth opportunities in wearable technology, healthcare, automotive, and cloud infrastructure. Jabil's subsidiary NyproMold, for instance, could have a favorable impact on the manufacturing capacity output of drug developers thanks to new mold technology advancements. There are plenty of growth opportunities at Jabil beyond Apple.
Looking ahead, Jabil is projected to grow its full-year EPS from a reported $2.07 in 2015 to $2.83 by 2017, with its revenue climbing by more than $3 billion over that time span. Its PEG ratio of just 0.75, and dividend yield of 1.4%, provide even more incentive to consider owning this cheap growth stock.
