Companies that grow sales and earnings rapidly for long periods of time stand a good chance of becoming great long-term investments. That's why why we Fools are constantly on the hunt for stocks that can expand at rapid rates for years, as those which can do so successfully can produce life-changing returns.
With that in mind, I searched through the S&P 500 for the highest projected earnings-per-share growth rates over the next five years. To limit the field slightly, I only included companies in the list that have grown their earnings per share at a rate of at least 25% annually over the past five years. Doing so helps to eliminate companies from the group that have highly cyclical earnings or are only just now becoming profitable.
Here's a look at the highest-growth stocks that the screen produced, and some commentary on whether or not you should consider buying them.
No. 3: An emerging fitness giant
First up is one of the best growth stocks over the past decade, Under Armour (NYSE:UAA) (NYSE:UA). Under the strong leadership of founder and CEO Kevin Plank, Under Armour has rapidly taken share in the markets in which it competes. In fact, the company recently announced its 25th consecutive quarter of at least 20% revenue growth, putting it on pace to generate almost $5 billion in annual sales this year.
What's exciting about Under Armour today is that the company's brand is appealing to consumers outside of North America. Last quarter international sales jumped by 68% to $150 million; while this division currently only represents 15% of total sales, there's so much room left for expansion that this division holds promise to become a significant revenue and earnings driver over the next decade.
Over the next five years, analysts believe that Under Armour's exceptional rate of growth will continue, with current estimates calling for EPS growth of roughly 23% annually. Understandably, Wall Street's enthusiasm for the company's growth prospects has resulted in a premium P/E ratio, with shares currently trading hands for more than 55 times next year's earnings estimates.
History has shown that buying the stock regardless of its nosebleed P/E ratio has been a smart move, but with so much future growth already priced in, I'm inclined to believe that buying in stages on any future dips might be the smartest way to become an investor.
No. 2: The top dog in video games
The massive success of Pokemon Go should serve as a nice reminder that video games have truly become big business. For that reason I wasn't surprised to see that Activision Blizzard (NASDAQ:ATVI) held the No. 2 spot of the companies in the S&P 500 with the highest growth projections.
Activision has been churning out hit games for decades, with massive winners like Call of Duty, World of Warcraft, and Skylanders under its belt. More recently we've seen new franchises enter the fold such as Destiny and Hearthstone, which gamers have embraced with open arms. In total, last quarter Activision Blizzard counted 544 million monthly active users across Activision, Blizzard, and King Digital, the last of which it acquired earlier this year. That's simply a massive user base, and many believe that it will only continue to grow as consumer spending around the world increases.
Beyond the gamer expansion, this company has nicely benefited from the gradual shift to digital game sales, bypassing the need to visit a retailer in order to play one of the company's hit games. Combining that trend with the increase in in-game purchases, Activision has been able to consistently grow its gross margin over the past decade, making the company increasingly more profitable.
Given the slew of existing and upcoming franchises, analysts are feeling good about the company's growth prospects. Current estimates call for earnings to grow by more than 23% annually over the next five years, which is quite fast for a company that's only trading for 19 times next year's earnings. If you believe the company can live up to its growth potential, then right now looks like a great time to consider buying shares.
No. 1: The house that Zuckerberg built
Do you remember when the social network giant Facebook (NASDAQ:FB) first went public and shares initially struggled to gain traction? Media outlets everywhere were calling it a busted IPO, and many wrote off the high-profile company as a potential investment, questioning everything from its lack of presence on mobile to competition from upstarts like Snapchat.
Fast forward to today: Facebook has silenced the critics and gone on to produce phenomenal results, rewarding patient investors who bought at the "expensive" IPO price.
What's so amazing about this growth story is that even at today's gargantuan size, the company is still adding users at a brisk pace. As of the second quarter Facebook had 1.71 billion monthly users, which was up 15% over the year-ago period. Even more impressive is that daily active users grew by an even faster 17%, to 1.13 billion.
Combining those mind-boggling numbers with the company's ability to increase revenue per user, sales grew by 59% to $6.24 billion. Even with continued growth in expenses the company still managed to expand its margins, which propelled earnings per share up 184% to $0.71.
As impressive as all that is, it's important to remember that Facebook has only barely started scratching the surface of what's possible with its other platforms like Instagram, WhatsApp, and Messenger. If the company can monetize those successfully -- and its success with its main Facebook platform suggests that's very possible -- then earnings per share will likely have plenty of room to run from here.
Analysts certainly believe that the gravy train will continue from here on out, calling for EPS growth of more than 35% over the next five years. That kind of growth has awarded Facebook's stock a premium trailing P/E ratio of nearly 60, but this company's forward growth rate is so high that it's only trading for about 24 times next year's earnings. Those numbers make me believe that Facebook's stock is nowhere near overvalued today, so tucking a few shares into your portfolio might prove to be profit-friendly.
Brian Feroldi owns shares of Activision Blizzard, Facebook, and Under Armour (A and C Shares). Like this article? Follow him on Twitter where he goes by the handle @Longtermmindset or connect with him on LinkedIn to see more articles like this.
The Motley Fool owns shares of and recommends Activision Blizzard, Facebook, and Under Armour (A Shares). The Motley Fool owns shares of Under Armour (C Shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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