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.
Buffalo Wild Wings Inc.
We'll begin the week by focusing on a company that could make both your mouth and your portfolio salivate with anticipation: Buffalo Wild Wings (NASDAQ:BWLD).
Buffalo Wild Wings' growth strategy has first and foremost revolved around the aggressive expansion of its restaurants throughout the U.S. and Canada. The company currently has more than 1,190 locations around the world, and it plans to open 40 new company-owned restaurants in 2016, along with 30 to 35 franchised locations in the United States.
Rapid expansion is one of the easiest ways to build a brand in the competitive food industry. Best of all, Buffalo Wild Wings is doing so almost entirely with its operating cash rather than digging itself into debt. This rapid expansion led revenue higher by 15% in the second quarter from the prior-year period.
Overseas markets present another intriguing growth opportunity for Buffalo Wild Wings. In one respect, the company is attempting to expand its BWW brand internationally, with 12 to 15 new BWW restaurants expected this year. Buffalo Wild Wings offers an affordable yet unique casual dining experience that could catch on overseas. Buffalo Wild Wings is also investing in emerging overseas brands, such as R Taco, which the company has a majority interest in. Looking beyond the borders of the U.S. could diversify BWW's growth potential, allowing it to cope better when recessions strike.
The company may also benefit from a host of new growth initiatives. During the third quarter, BWW launched a 15-minute guarantee for its FastBreak lunch program with a focus on bringing in more lunch-time traffic. It's also reaching for a younger generation of customers (while working to keep its labor expenses low) by introducing tabletop tablets at the majority of its locations. These tablets can help speed drink orders and facilitate faster table turnover, which is critical to maximizing margins in the restaurant industry.
After generating $4.97 in full-year EPS in 2015, BWW looks to be on pace for nearly $7 in full-year EPS by 2017. The wings aren't the only thing that's hot around here, which means this growth stock should be on your watchlist.
HCA Holdings Inc.
Secondly, growth investors are probably going to want to get HCA Holdings (NYSE:HCA), one of the largest acute care hospital operators in the country, on their radar.
There's no beating around the bush with HCA. When it comes to catalysts, nothing has been bigger for HCA than the passage and implementation of the Affordable Care Act. The ACA, which you may know better as Obamacare, has pushed the uninsured rate to all-time record lows. According to the Centers for Disease Control and Prevention, the uninsured rate at the end of Q1 2016 was just 8.6%.
This is meaningful for HCA Holdings because a higher insured rate means a better likelihood of being paid for services rendered and fewer doubtful accounts. The less HCA writes off in uncollected revenue, the more it can reinvest in new equipment, acquisitions, and potentially even share buybacks and/or a future dividend payment.
Another ancillary effect of the ACA is that it's convinced HCA Holdings to increase its urgent care offerings. Urgent care centers have lower copays than heading to an emergency room, and they're a popular option for consumers with an Obamacare plan, or those who've gained insurance through the expansion of Medicaid in 31 states. HCA had more than 1 million urgent care visits in Q4 2015, a 500% increase from the prior year period, according to Forbes.
HCA Holdings is also expected to benefit in the coming decades from an increase in medical procedure demand. Based on estimates from the U.S. Census Bureau, the elderly population in the U.S. could nearly double to 83.7 million by the year 2050 from 43.1 million in 2012. On top of these expanding statistics, life expectancies continue to rise, too. The assumption is that as medicine and healthcare knowledge improves, the need for preventative surgeries could rise. That bodes well for HCA Holdings over the long run.
Lastly, growth investors might take a liking to homebuilder NVR (NYSE:NVR), which primarily focuses on midscale-to-upscale homes on the East Coast.
One of the biggest benefits in the current environment for NVR are low lending rates. A home is arguably the largest purchase most people will make during their lifetime, meaning low financing rates can be critical to encouraging consumers to make the jump from renter to homeowner. With the Federal Reserve mostly walking on eggshells with regard to rate hikes, homebuilders should continue to see benefits from historically low interest rates.
Secondly, NVR's focus on midscale-to-upscale to upscale homes means it's also targeting a different type of customer. Well-to-do individuals and families aren't immune to economic downturns, but they often fare better than lower- and middle-income individuals and families. What this means for NVR is that its focus on affluent homebuyers tends to yield fewer hiccups when U.S. economic growth stagnates or even reverses.
But what could be the most intriguing factor of all is NVR's land strategy. During and following the Great Recession, many homebuilders bought what they perceived to be inexpensive land to build on, miring themselves in debt in the process. NVR hasn't been too keen over the years on purchasing its land from the get-go. Instead, it optioned its land, which kept its debt levels low and provided the company with incredible financial flexibility relative to its peers. This is why NVR remained profitable even during the darkest hours for the homebuilding industry.
Having recently reported 12% top-line sales growth in the second quarter and a 14% jump in new orders, this homebuilder with a PEG of around one looks to be worth a closer inspection by growth investors.
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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