Speaking of babysitting, someone needs to take away this baby's choking hazard. Seriously. Image source: Getty Images.
All too often when we research high-growth stocks, it seems to entail looking at businesses that require continuous monitoring to ensure their respective investment theses remain intact.
That's not to say investors shouldn't keep regular tabs on any given stock they own. To the contrary -- even with the most stable names our market has to offer, shareholders would do well to keep their eyes peeled for any disruptive events that might fundamentally change the business for the worse.
However, what about high-growth stocks that don't require your constant attention? We asked three Motley Fool contributors to each identify a high-growth stock you don't need to babysit. Read on to see which companies they chose and why.
Steve Symington: I've pounded the table several times in recent months for growth-hungry investors to buy Zillow Group (Z 0.43%) (ZG 0.73%). Most recently, I voiced my bullishness on the heels of Zillow Group's impressive first-quarter 2016 results, which saw revenue growth accelerate to a better-than-expected 25% year over year as a company-record 166 million unique users visited its four sites (Zillow, Trulia, StreetEasy, and HotPads) in the month of March.
But until now, I'm not sure I would have gone out on a limb to call Zillow a stock you don't need to "babysit," especially as a troublesome trade secrets lawsuit with competitor Move.com was consistently diverting precious financial resources that, to borrow the words of Zillow CFO Kathleen Philips, "could otherwise be used to support innovation and growth, or margin expansion."
Last week, though, Zillow shares jumped after the company revealed a $130 million settlement that involves all parties agreeing to dismiss their respective claims and counterclaims, with neither side admitting liability, wrongdoing, or responsibility. Though $130 million might seem like a steep price for Zillow to pay to rid itself of this litigation, some analysts had feared such a settlement could reach as much as $500 million. In addition, note Zillow's current guidance already factored in legal fees of between $50 million and $55 million this year (including $15.7 million already incurred in Q1). Also, the settlement is purely monetary, which means Zillow won't need to change the way it operates.
In other words, with the weight of this costly lawsuit now lifted from its shoulders, Zillow will be free to start plowing these funds into further innovation, accelerating growth, and expanding margins as it strives toward sustained profitability. And investors can now rest easier as they watch Zillow's long-term growth story play out.
George Budwell: I think generic drug king Teva Pharmaceutical Industries Ltd. (TEVA -1.10%) is shaping up to be a fairly safe growth stock to own for the longterm right now. The drugmaker's story largely centers on the potential closure of its deal to acquire Allergan's (AGN) generic drug unit later this month. This deal, if approved by the Federal Trade Commission, or FTC, will add around a thousand new products to Teva's portfolio and help the company soften the blow from the entrance of generic rivals for its flagship multiple sclerosis drug Copaxone.
The good news is that this deal appears to be close to wrapping up. Earlier this month, for instance, Allergan and Teva struck a $350 million agreement with Dr. Reddy's Laboratories Ltd. to divest eight generic drugs in an effort to win U.S. antitrust clearance from the FTC. While there's no guarantee this divestiture will be enough to satisfy regulators, it does show that Allergan and Teva are making strides toward cementing their transaction in a timely manner.
Looking ahead, Teva plans on updating investors on its business outlook this September -- presumably once it's begun the process of integrating Allergan's generic unit in earnest. Although there are a number of moving parts here that'll probably get worked out by September, the Street already thinks the drugmaker's shares could rise by a noteworthy 27% over the next year as a result of this game-changing acquisition. While the Street's rather optimistic view is all well and good, I think the biggest takeaway is that Teva would greatly diversify its revenue base through this acquisition, making it a far less risky growth stock to own going forward.
Matt DiLallo: Midstream MLPs aren't often considered growth stocks, but Phillips 66 Partners (PSXP) is really breaking that mold. The company has more than doubled its earnings over that past year, with plans to more than triple earnings by 2018. That growth is pretty much locked in because it's backed by a visible slate of fee-based organic growth projects and drop-down transactions from the company's parent, Phillips 66 (PSX -1.82%).
Those drop-down transactions are the foundation of Phillips 66 Partners' growth plan, with Phillips 66 seeing the potential to drop down almost $10 billion in assets to its MLP by 2018. Some of these assets are currently operated by Phillips 66, but they would be better off owned by an MLP, while others are midstream assets that it's building specifically to drop them down to its MLP. In fact, just last month, the two companies connected on one such transaction, with Phillips 66 Partners paying $775 million for a pipeline and the remaining interest in two newly constructed NGL facilities. In addition to these drop-down transactions, Phillips 66 Partners is investing in organic growth projects for its own account, with the company planning to spend $314 million this year on the construction of three pipelines.
Another thing that makes Phillips 66 Partners a growth stock that doesn't need to be babysat is the fact that all of its assets are backed by long-term, fee-based contracts, which provides cash flow security. Further, the company has a top-notch balance sheet with an investment-grade credit rating and a low leverage ratio. That strong financial foundation is what has kept the company in the position to hit its growth targets amid one of the worst downturns to hit the energy sector in decades.
