The recent bull market has pushed many growth stocks' valuations into the stratosphere. Thankfully, not every growth stock is priced for perfection. Skyworks Solutions (SWKS 2.08%), Regeneron Pharmaceuticals (REGN 0.37%), and Under Armour (UA 1.39%) (UAA 0.74%) all hold promising growth potential, yet are currently trading at attractive valuations. Here's why I'd happily buy any of them today.
Image Source: Getty Images.
The smartphone slump is over
Skyworks Solutions is a leading manufacturer of radio frequency chips that help devices connect to the internet. While this company's stock has been rallying for several years now, it put investors on an unpleasant roller coaster ride in 2016. Shares were slammed over concerns that demand for smartphones was slowing. Those fears proved to be well-founded. The company went on to produced a series of earnings reports that saw its top line head in the wrong direction. That's not something growth investors wanted to see, leading many traders to hit the sell button.
Thankfully, the worst of the smartphone slowdown appears to be over. When Skyworks reported fiscal first-quarter results in January, management predicted that revenue in the upcoming quarter would rise by 8%. Better yet, management credited its upbeat guidance to an "expanding product pipeline and accelerating design win momentum." That hints that its efforts to diversify its business away from Apple and Samsung -- which are two of its biggest customers -- are starting to pay off.
Looking ahead, investors have reasons to believe that the top-line growth is here to stay. Skyworks is well positioned to benefit from the "Internet of Things" trend. In addition, the rollout of 5G wireless technology also promises to be a massive tailwind. When adding in the potential for margin improvement and the company's habit of buying back stock, analysts believe that Skyworks' bottom line will grow by nearly 15% annually over the next five years. That's quite a fast growth rate for a company trading for less than 14 times forward earnings.
New drugs to the rescue
While long-term investors in biotech giant Regeneron Pharmaceuticals have enjoyed a phenomenal run, the company's recent performance hasn't been all that impressive. Shares are down more than 34% from their highs in 2015. What gives?
You can blame the downfall on a number of factors. First, the company reported a handful of clinical setbacks in 2016 that gave investors pause. Next, the FDA rejected sarilumab -- a hopeful treatment for rheumatoid arthritis -- because of manufacturing concerns. Finally, the company is losing a legal battle with Amgen over its new cholesterol-busting drug, Praluent. When adding in slowing sales of its top-selling drug, Eylea, it's no wonder shares have headed in reverse.
Despite all of the bummer news, I think there are reasons for optimism. First, Regeneron and Sanofi are slated to receive a go/no-go decision from the FDA in the coming weeks about their new eczema drug candidate, Dupixent. Many believe this drug holds blockbuster potential, so getting the green light could help to reignite investors' enthusiasm. Next, sarilumab should be resubmitted to the FDA soon now that the manufacturing issues are completed. Finally, while Eylea's state-side growth rates are stalling, the drug is still growing by double-digits overseas.
When added together, Regeneron offers reasons to believe that it is still a growth company. Market watchers appear to agree. Current estimates call for bottom-line growth of nearly 19% annually over the next five years. With shares trading for 25 times forward earnings estimates, I think this is a growth stock worthy of your capital.
This growth story isn't busted
The last year hasn't been kind to shareholders of Under Armour. The company's stock has shed more than half of its value after management took an ax to profit growth projections. The original forecast called for $800 million in profits by 2018, but the company has since abandoned that target. When adding in a holiday quarter that featured sales growth of just 12%, it is understandable why some investors fear that this growth story is over.
Despite the pain, I refuse to give up on Under Armour. In fact, I think the huge sell-off is actually a great opportunity to get in.
Why am I still bullish? First, why sales growth was disappointing in the fourth quarter, there are a handful of factors that explain the slowdown. North American retail stores in general performed poorly during the holiday season, and 85% of Under Armour's revenue is derived stateside. That means the company isn't immune to the slowdown in retail. In addition, 2016 also featured a number of high-profile bankruptcies from retailers like Sport's Authority, Eastern Mountain Sports, Sports Chalet, and more. Those headwinds should abate in 2017, and a new partnership with Kohl's should also help to shore up the company's retail presence.
Second, while overall results were weak, Under Armour did have a few pockets of strength. International sales were especially strong, rising 63% last year. That tells me that this brand has overseas appeal, which is most certainly a positive sign.
Finally, the company's direct-to-consumer strategy also appears to be working. Revenue from this channel grew 23% last year and comprises 40% of total sales. Continued growth here could go a long way toward offsetting any future retail sales weakness.
While Under Armour's stock doesn't look classically cheap -- it never does -- I still think this company has enough growth potential left to more than justify an investment.
