Want to get in on the next great growth stock? I certainly do. That's why I regularly scan the markets in search of stocks that promise hyper growth.
I recently ran a screen on Finviz to identify companies with the following characteristics:
- Based in the United States.
- Market cap over $300 million.
- Annual sales and EPS growth of at least 25% over past five years
- Estimated EPS growth of at least 25% this year and over the next five years
This criteria yielded Paycom Software (PAYC -0.06%), Supernus Pharmaceuticals (SUPN 0.64%), and Yelp (YELP 0.68%). Let's take a deeper dive into all three companies to see if any could be worth owning.
An all-in-one payroll system
Payroll is a boring but essential business functional for every company. There are legacy payroll processors that have been in business for decades, but their systems tend to be outdated, and generally do not mesh well with other mission-critical HR systems. That means that many companies are forced to use multiple vendors to cobble together coverage for all the services that they need.
By contrast, Paycom Software offers a one-stop solution. The company's cloud-based software provides HR teams with a range of tools for recruiting, time management, scheduling, performance monitoring, document management, and more.
The company's integrated solution has been a bit hit in the marketplace. Paycom has been growing by double-digit percentages for years, and now boasts over 17,000 clients. With a retention rate of more than 90%, it is clear that customers feel that this company offers a special service.
Wall Street believes that Paycom's unique product offering will allow it to continue to take market share. Current projections call for bottom-line growth of nearly 40% over the next five years. While Paycom's trailing P/E ratio of 74 is expensive, historically, paying a premium to own this stock has been more than justified.
A biotech in growth mode
Supernus Pharmaceuticals is a biotech company focused on diseases of the central nervous system. So far, it has crossed the finish line with two drugs -- Oxtellar XR and Trokendi XR -- which are used to treat epilepsy. Both launched in 2016, and have been rapidly adopted by the healthcare community.
In total, sales of Oxtellar XR and Trokendi XR exceeded $210 million in 2016, which represented growth of 46% over the prior year. Better yet, Supernus succeeded at translating that strong top-line growth into big gains on the bottom line. EPS in 2016 came in at $1.76, which was up a ridiculous 528% over 2015's result.
Management is predicting that the good times will continue to roll in 2017. Revenue is expected to land between $265 million to $275 million, the midpoint of which represents 26% growth. Supernus' pipeline also provides the chance for additional upside down the road. A Phase 3 trial for SPN-810, a treatment for impulsive aggression associated with attention deficit hyperactivity disorder, is currently in the enrollment stage. Meanwhile, it recently completed Phase 2b trials for SPN-812, another treatment candidate for ADHD. Management believes that both drugs hold nine-figure sales potential.
And yet, despite already achieving profitability, boasting a promising pipeline, and analysts projecting future profit growth of 27% annually, the company's trailing P/E ratio is only 17. Those figures hint that Supernus is worthy of a deeper dive.
A review site on the rebound
Yelp hit the public markets with a lot of fanfare in early 2012. Investors saw a lot of potential for the online review site to grow in popularity with consumers and merchants alike. That optimism caused the company's share price to more than tripled in the two years following the IPO.
Unfortunately, user growth started to slow soon after the stock hit its peak, and the company's financial statements started to deteriorate. Next came turmoil in the executive suite as the company's co-founder called it quits. The combination of events caused shares Yelp to plunge.
Thankfully, the company has gotten its financial house in order, and shares have since been on the upswing. It now boasts more than 117 million active users who regularly turn to it for reviews of local restaurants, contractors, service businesses, and more. Given the growing importance of the Yelp community, businesses are increasingly willing to advertise on the site. At year's end, more than 138,000 businesses had created a local advertising account, which was up a strong 24% year over year. That helped to drive a 36% increase in local advertising revenue, swinging the company's bottom line into the black.
From here, Yelp plans to roll out new services in an effort to grow its user base. In turn, Wall Street is projecting profit growth of more than 35% annually over the next five years. However, with shares trading at more than 85 times next year's anticipated profits, that prosperity appears to be already baked into the share price. Given the company's checkered history, I'd suggest that potential investors should keep this stock as just a watchlist candidate for the time being.