With the stock market in nearly nonstop rally mode over 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.
NXP Semiconductors NV
Growth investors looking to kick-start their long-term portfolios would be wise to consider giving NXP Semiconductors (NXPI 5.22%), a manufacturer of connectivity and microcontroller solutions, a closer look.
Perhaps the biggest knock against NXP Semiconductors is that Wall Street expected it to change the world too quickly. NXP's future essentially banks on the success of the Internet of Things, or IoT. NXP is involved in the connectivity solutions that'll allow devices to communicate with one another, from thermostat innovations in your home to the car you're driving. Unfortunately, some IoT innovations haven't caught on as quickly as anticipated, which has dragged NXP's stock down at times. In particular, NXP's near-field communication chips, which allow mobile devices to communicate with retailers' point-of-sale devices, have been adopted slowly.
But Wall Street has a tendency to get ahead of itself when game-changing technology is introduced, and this is probably the case with NXP, which actually makes a very strong case for growth over the long run.
For instance, NXP's merger with Freescale, which was completed in December, offers an abundance of benefits for the combined company. The combination should allow for up to $500 million in eventual cost synergies per year, with $200 million in cost savings expected in 2016.
More importantly, combining NXP and Freescale creates a company that's leading in general purpose microcontroller products, mobile payment-based semiconductor solutions, and automotive semiconductor solutions. In particular, the addition of Freescale doubles the percentage of auto-related revenue for NXP to about 40%. Automotive technology is a multi-decade, possibly double-digit, growth opportunity for NXP.
Investors also shouldn't overlook the high probability that combining these two companies will lead to better pricing power. With a larger share of the device connectivity market, NXP is, pardon the pun, in the driver's seat, and its margins should improve as a result.
Sporting a PEG of just 0.5, NXP Semiconductors is a growth stock worthy of your attention.
Air Lease Corporation
Another surprising growth stock that could turn heads is Air Lease (AL 5.38%), a company that purchases new aircraft then leases those aircraft commercially for extended periods of time.
Normally a strong performer, Air Lease's stock has struggled since May of last year as the price of crude oil has dipped. Crude oil and jet fuel prices tend to move in step, and the fall in crude has pushed jet fuel prices down. Lower jet fuel prices have reduced the urgency for airlines, especially major airlines, to upgrade their fleets to more fuel-efficient aircraft. As a reminder, jet fuel costs are traditionally an airline's largest expense.
Despite this recent weakness, it doesn't appear that Air Lease's business model is in any way broken.
For starters, Air Lease's business model itself is one of the company's strongest selling points. The company's 245-aircraft fleet has a weighted-average and remaining lease term of 3.7 years and 7 years, respectively, meaning the company has extremely predictable intermediate-term cash flow. With the rare exception of bankruptcies, which do tend to occur from time to time in the debt-riddled airline industry, Air Lease can plot its strategic moves multiple quarters in advance thanks to its long-term lease contracts.
Another key selling point for Air Lease is that energy prices are probably headed higher over the long run. Rising crude prices will favor the push for airlines to lease as opposed to buy new aircraft -- not to mention that leasing aircraft is cheaper for airlines than buying new planes.
Finally, Air Lease can keep its engine churning by selling aircraft from its lease portfolio from time to time. This capital, along with its cash flow and debt, help finance the modernization and expansion of its fleet.
Also sporting a PEG of 0.5, Air Lease could wind up flying high for your portfolio,
Lastly, for you small-cap growth stock investors out there, we have social media interaction website MeetMe (MEET).
Like nearly every social media company that's come before, MeetMe has struggled through the ups and downs of rapid growth and continued losses. MeetMe more than quadrupled its sales in 2012 from 2011, but ongoing losses and shareholder dilution ultimately wrecked multiple rallies. However, with MeeMe delivering its first annual profit for shareholders last year and having a foundation laid for the future, it's finally worth a serious look from growth investors.
MeetMe's primary focus has been millennials, with the company counting on reaching millennials via mobile devices. Based on recent data from MeetMe, it counts more than one million daily active users, with approximately 90% of its traffic coming from mobile devices. MeetMe is counting on advertisers wanting a piece of those eyeballs, which has helped improve its advertising pricing power. It's also relying on the desire of millennials to forge connections by selling subscriptions to its services.
Acquisitions are another reason MeetMe could connect with growth investors. Arguably the company's most transformative transaction occurred in June when it agreed to acquire mobile social network Skout for $28.5 million in cash and 5.37 million shares in MeetMe common stock, implying nearly a $55 million valuation. Skout had 3.5 million monthly active users in May 2016, and it's added an average of 42,000 new users per day in 2016 (again, through May). Inclusive of MeetMe's base, the combined entity will have 8.5 million mobile monthly active users and 2.1 million daily active users, and the acquisition essentially doubles the number of chats sent per day. This added scale is expected to result in immediate earnings accretion and improved advertising price leverage.
With revenue expected to double between 2016 and 2019, and EPS on track to more than quadruple between 2015 and 2017, growth investors may not want to overlook this social butterfly of a stock.