Buying into stocks that offer huge growth potential can be a smart way to invest, but companies that offer explosive growth tend to be quite risky. While the ones that succeed can go on to produce multibagger returns, many high-growth stocks are destined to wipe out in spectacular fashion. For that reason, it's especially important for potential investors to be quite picky when choosing which high-growth stocks are deserving of their money.
With that in mind, I searched for stocks that promise fast growth by screening for the following qualities: sales growth of at least 25% over the past five years, earnings growth of at least 25% over the past five years, and a market cap of at least $2 billion. From there, I cherry-picked three companies that are projected to grow EPS at very high rates over the next five years, which produced the following three stocks: Paycom Software (NYSE:PAYC), Abiomed (NASDAQ:ABMD), and Groupon (NASDAQ:GRPN).
Let's take a closer look at each of these to see if any are worthy of an investment.
A payroll processing disrupter
First up is Paycom Software, a company focused on cloud-based human capital management software.
Paycom started out with a focus on payroll processing for small and medium-sized companies, but it has since layered on a slew of new services that appear to be a hit with its customers. The company's software-as-a-service package can help these companies with mission-critical tasks as well as mundane tasks like background checks, employee reviews, scheduling, and more.
It's as clear as day that the company's software is in demand as Paycom is rapidly expanding. Sales grew by a strong 51% last quarter to $73.9 million, and EPS jumped by an even more impressive 80%. Better yet, 98% of the company's revenue is recurring, which provides it with predictable future revenue and a strong base to grow from.
Looking ahead, the company's scalable business model and large market opportunity have convinced investors that Paycom's fast growth is here to stay. Analysts are projecting that earnings will grow by more than 50% annually over the next five years, and they have priced shares accordingly. Right now, Paycom is trading for nearly 77 times trailing earnings. That's a premium price tag, but the company's absurdly high projected growth rate pushes its price-to-earnings-growth ratio, or PEG, to a modest 1.26. That suggests paying up to own a small piece of this company might actually make sense.
Pumping out profits
Heart disease is the leading cause of death in this country, and myocardial infarction -- which is more commonly known as a heart attack -- is a major reason why. Roughly 735,000 Americans suffer a heart attack each year, and that number is likely to head higher over time as the baby boomer generation continues to age.
Those facts have created a huge growth market for Abiomed, a medical device company that sells pumps that keep a patient's heart going after a heart attack, or during heart surgery. The company's minimally invasive Impella family of products have proven to be a big hit within the medical community, which has driven rapid adoption.
Last quarter, Abiomed's sales jumped by a strong 40% to $103 million, which allowed the company to grow its EPS by an even faster 45%. And looking ahead, there are plenty of reasons to believe the company's torrid growth rate will continue.
In March, the FDA approved the use of Abiomed's Impella heart pump in patients who experience cardiogenic shock from a heart attack. That happens in roughly 7.5% of heart attack cases, yet the company's current penetration rate in this indication is only about 5%. As more providers realize the benefit of the company's system, sales should continue to surge. Add in the growth prospects of international markets, and it's not hard to be optimistic about Abiomed's future prospects.
Over the next five years, analysts see the company growing its bottom line by more than 27% annually. That's an extremely fast growth rate, but with shares trading for more than 128 times trailing earnings, Abiomed's PEG ratio is a sky-high 3.77. That makes me think Abiomed is a great stock to put on your radar now and nibble at once the valuation comes back down to earth.
A beaten-down deal maker
Groupon came public in late 2011 with a lot of fanfare and high expectations baked into its share price. Unfortunately, the online-deal provider has struggled to live up to its growth potential, causing early investors to lose a bundle.
There's no doubt the company has an awful track record as a public company, but there may be signs that it's finally looking to get its act together. For one, the company is selling off some of its international assets and laying off workers in order to refocus its attention on its U.S. business. Groupon is beefing up its marketing efforts in order to draw in new customers.
Last quarter's results hint that the shift may be working. Gross billings in North America actually jumped by 8% as the company's user base continues to grow. That's an encouraging sign, and since Groupon still boasts a balance sheet packed with more than $780 million in cash and no long-term debt, the company has plenty of financial flexibility to keep that number heading in the right direction.
Groupon's share price has reacted favorably to this news, sending shares up more than 80% since the start of the year. Analysts are also starting to warm up to the company again and have projected bottom-line growth of more than 25% over the next five years.
That's all great, but despite Groupon's single-digit share price, its stock is currently trading for nearly 70 times next year's estimated earnings. That's quite expensive for a company with such a checkered history, so even though this company is in the midst of an interesting turnaround, I'd advise keeping away.
Brian Feroldi has no position in any stocks mentioned. 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.
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