This year didn't exactly begin on the right foot. The three major U.S. indexes wound up tumbling between 8% and 10% during the first two weeks of 2016, marking the worst start to a new year in history. The subsequent rally in the S&P 500 between mid-February and March 31, 2016, the end of the first quarter, also marked the biggest loss-erasing intra-quarter rally the index had seen since 1933.
And yet, the S&P 500 ended last week at an all-time closing high once again.
For buy-and-hold investors, the trading action this year has vindicated the strategy of buying high-quality companies and staying put for the long term. Yet quite a few high-quality names have also moved lower for the year, giving long-term investors an opportunity to potentially scoop up great stocks at bargain prices.
Four discounted top growth stocks you should consider buying
What makes some of this year's bargains so enticing is that a few of these high-quality companies are growth stocks. Though the term "growth stock" can be completely arbitrary, I prefer to define a growth stock as a company that has the capacity to grow by 10% or more per year. Growth stocks are operating in an especially friendly environment at the moment, with lending rates remaining near their historic lows. This is giving growth companies the opportunity to reinvest in their business, hire, and acquire, for relatively minimal borrowing costs.
After perusing a list of growth stocks that are down more than 10% year-to-date, four stood out as being attractively priced for long-term investors.
It's been a miserable year for shareholders of rare-disease drug developer Alexion Pharmaceuticals (NASDAQ:ALXN), whose shares have lost about a third of their value through Friday, July 29.
The cause of the tumble can be traced to two key events. First, investors took a risk-averse approach to biotech beginning when the calendar ticked over to 2016. Alexion, along with its peers, were hammered by investors looking for more defensive assets to buy during the beginning of the year downturn. Secondly, in June Alexion announced that a late-stage trial involving blockbuster drug Soliris as a treatment for myasthenia gravis, a rare neuromuscular disorder, missed its primary endpoint. Investors had been counting on Soliris gaining another label expansion.
Nonetheless, Alexion's 33% drop looks like the perfect opportunity to dip your toes into the water, and there are three specific reasons why.
First, Alexion is a rare-disease drugmaker, meaning it receives special orphan designations that protect its medicines from competition, and it has reduced likelihood of facing competition at any point in the intermediate term. This means strong pricing power for Alexion.
Second, Alexion's Soliris is doing just fine, even without myasthenia gravis. Solriis' sales grew 10% on a year-over-year basis in the second quarter, while volume jumped 15%. As FiercePharma has suggested, doctors may continue to use Soliris as an off-label solution for myasthenia gravis, which could make its disappointing phase 3 results sort of a moot point.
Lastly, Alexion's acquisition of Synageva BioPharma gave it access to Kanuma, a lysosomal acid lipase deficiency drug that's capable of $1 billion in peak annual sales. Taking the load off Soliris should help Wall Street view the company as more balanced.
Added together, these three catalysts could double Alexion's full-year EPS over the next three or four years to $10, which is what makes Alexion such an attractively priced growth stock.
It wasn't a completely miserable year for shareholders of footwear and accessories retailer Skechers (NYSE:SKX) until the company reported its second-quarter earnings results two weeks ago. Through Friday, Skechers' stock is now showing a 20% loss for the year.
There were a number of things that irked Wall Street in Skechers' Q2 results. These included adverse currency effects, a fire at a Malaysian warehouse, and a shift in its domestic wholesale business out of the second quarter and into the first quarter. The end result was Skechers reporting weaker-than-expected revenue and EPS figures compared to what Wall Street expected.
Personally, though, I'd suggest stepping right over these skeptics and lining up to buy shares of Skechers here. One of the biggest reasons why is that the concerns noted above are incredibly short-sighted. Currency fluctuations aren't within the control of Skechers; what we should really be focused on is the underlying business model. Here, we're witnessing rapid store growth -- 133 net stores opened during Q2 -- and continued profitability. Additionally, a fire in Malaysia is more than likely not a multi-quarter event, nor is the mere shifting of sales from one quarter to another. These all look like classic Wall Street overreactions.
On the other end of the spectrum, Skechers has been financing its expansion almost entirely through its free cash flow, leaving it in good shape compared to other retailers that are drowning in debt. The company remains on track to have more than 1,600 brick-and-mortar locations in place by year's end.
Also helping the company's cause is its vast array of multi-generational brand ambassadors. From famous drummer Ringo Starr and world-class boxer Sugar Ray Leonard, who can relate to the older generation, to recording artists Demi Lovato and Meghan Trainor, who speak for a younger generation, Skechers has the ability to appeal to a broad audience.
With sales expected to grow more than 10% per year for the foreseeable future, Skechers is a growth stock worth your consideration.
One of the smartest ways growth investors can play the low interest rate environment is by looking at homebuilders. Specifically, luxury homebuilder Toll Brothers (NYSE:TOL), which is down 16% year-to-date through Friday, July 29.
In general, homebuilders have been dragged down by concerns that persistently low lending rates could mean a weakening U.S. economy. If the U.S. economy weakens, it could lead to a rise in unemployment, stagnation in wages, and a slowdown in the number of people buying new homes. This uncertainty has been an ongoing trend playing out throughout a number of sectors, and not just homebuilders.
However, this isn't a major concern for Toll Brothers for one simple reason: its clientele. Toll Brothers sells luxury homes that, as of the second quarter, had an average delivered price of $855,500, up substantially from $713,500 in Q2 2015. This means Toll markets to a more affluent clientele, which also happens to be less affected by fluctuations in the U.S. economy. These well-to-do individuals and families do like a great deal, and low lending rates are giving them access to some of the lowest jumbo mortgage lending rates on record. Not surprisingly, Toll's Q2 2016 backlog rose 20% in terms of dollars to $4.19 billion from Q2 2015.
Even more encouraging, recently released data from the National Association of Realtors showed that existing-home sales for June 2016 rose 1.1% to a seasonally adjusted annual rate of 5.57 million. This is the strongest annual reading since February 2007, and it's indicative of how powerful low lending rates are for driving consumers to take action to buy a home.
Until there are definitive catalysts to suggest that lending rates are expected to head higher, there's little reason to believe Toll will be adversely affected by the current economic environment. As such, with 15%+ revenue growth expected, Toll Brothers could be a sneaky strong growth stock to add to your portfolio at a bargain price.
Finally, I'd consider taking a walk on the wild side (for those of you with a stronger stomach for volatility) by considering social media giant Twitter (NYSE:TWTR) as a growth stock that could be worth buying.
Last week Twitter reported another disappointing quarter, highlighted by $602 million in revenue and a $0.13 adjusted profit per share -- importantly, the latter excludes $168 million in stock-based compensation. Wall Street had been looking for the social media company to generate $607 million in revenue, and investors were clearly not pleased with the year-over-year decline in adjusted EPS ($0.15 in Q2 2015 to $0.13 in Q2 2016). Worse yet, Twitter's management guided third-quarter revenue to a midpoint of $600 million, which is well below the $678 million the Street had been forecasting.
Despite this weakness, I remain bullish on Twitter as a growth stock for two important reasons. First, advertising revenue, though weakening from prior quarters, remains relatively strong. Advertising revenue, which accounted for 89% of total sales in Q2, rose 18% year-over-year. Remember, Twitter still has 313 million monthly active users, 82% of which were mobile users, and these are heavily sought after consumers for advertisers. What this means is Twitter will likely retain is pricing power on ads even with its user base growing in the low single-digits.
More important, we've seen the precedent of a social media company struggling to introduce new platforms before. Facebook went through similar growing pains five years ago when it was transitioning to mobile, but over time its strategy paid off. Twitter's growing pains seem to be tied to the wait to introduce streaming video events, which should encourage engagement and reinvigorate member numbers and ad growth.
Even with reduced growth estimates, Twitter is still fully capable of growing sales by more than 10% per year for the foreseeable future, making it a top growth stock worthy of a closer look.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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