Growth stocks should be an important part of nearly every investor's portfolio. And there are a lot of ways to find growth, across industries and kinds of companies. We asked three of our contributors to write about a growth stock they think is worth buying now, and they offered up three very different companies that are growing in different ways.
Keep reading to learn more about rapid-growth investment services company Envestnet Inc. (NYSE:ENV), video-game maker Take-Two Interactive Software Inc. (NASDAQ:TTWO), and engineering services provider NV5 Global Inc. (NASDAQ:NVEE).
When growth and value are joined at the hip
Chuck Saletta (Envestnet Inc.): No less an investing luminary than Warren Buffett once proclaimed that growth and value investing are "joined at the hip." By that, he means that growth estimates are always part of valuing an investment, and any intelligent investor will be looking to buy a company for a reasonable price when compared with that growth estimate. By that measure, Envestnet is a fairly rapidly growing company that can still find a place in a value-oriented investor's portfolio.
The investment-services provider is expected to grow earnings at a 20% annualized clip over the next five years, yet its shares are available at a reasonable price relative to that potential. Despite reporting an accounting loss in 2016, Envestnet generated over $62.8 million in free cash flow, with depreciation being a key driver of the gap between accounting profit and cash flow results.
Combining that potential growth with that cash flow, I estimate a fair value for Envestnet at around $1.5 billion, which is right in line with its current market capitalization. For a rapidly growing company like Envestnet to be available at a reasonable market price makes it worthwhile to consider as a potential investment whether you're looking for growth or value.
Perhaps best of all, Envestnet's growth is coming both through acquisitions and through its own inventiveness. That gives it multiple paths to attempt to achieve the growth expected of it. While there are no guarantees about the future until it comes to pass, it's generally a good idea to look for that kind of flexibility and adaptiveness when considering companies with rapid growth prospects. That combination makes Envestnet a growth stock worthwhile of consideration for an investment.
A good play in a growing industry
Seth McNew (Take-Two Interactive Software Inc.): The video-game industry has grown substantially over the past few years as the changing business model toward digital downloads and mobile gaming has helped to increase margins and in-game sales that have sent earnings and share prices of the biggest companies higher. Take-Two Interactive isn't nearly as big as some of its rivals, such as Activision Blizzard and Electronic Arts, but when it releases its fiscal Q4 ended March 31 and full-year 2017 earnings in May, it could get a major boost.
Take-Two announced in February that it acquired the privately held mobile-gaming company Social Point for $250 million in cash and stock. The acquisition should help with higher sales and net cash immediately as Social Point's well-performing business makes its way on to Take-Two's financial sheets, and management expects that utilizing Social Point's clear expertise in converting mobile gaming into higher sales will lead to long-term earnings growth. Another recent development is Take-Two's partnership with the NBA to deliver more e-sports content, including an e-sports league that follows the live NBA season and includes player and team interaction -- all starting in the 2018 season.
Take-Two expects sales growth of as much as 27% for fiscal 2017 year over year, but it could very well beat its own estimates, as it has done multiple times in recent quarters. The stock is likely to get a nice boost in May if sales and earnings show that the Social Point acquisition is showing promising early results and that the company's own operations continue to move higher.
A nearly "hidden" infrastructure growth opportunity
Jason Hall (NV5 Global Inc.): Since the election of Donald Trump as president, investors have flocked to stocks with potential to profit from increased infrastructure spending. And while the market has cooled substantially more recently under the realization that our elected officials can drag their feet even on something that more than 70% of Americans support, NV5 could be a great growth stock to own, no matter what happens with domestic infrastructure spending.
That's because the company, which is led by a talented and tenured executive team, is taking advantage of the opportunity to consolidate a very large industry that's made up of a handful of giants, but mostly much smaller companies. There are more than 140,000 engineering firms in the U.S., and a big part of NV5's growth strategy is acquisition.
There's some risk with this kind of model, but CEO Dickerson Wright and his executive team have a long track record of success in building companies in this industry. With a current market cap below $400 million, NV5 can make a lot of small acquisitions to drive growth that bigger competitors wouldn't even consider. Combined, this makes NV5 a compelling stock to buy.
To put it another way, infrastructure spending remains a wildcard for many construction and engineering companies, equipment makers and raw materials suppliers, but NV5 may not need to see a big boost in government spending to deliver great investor returns. If management can continue executing on a strategy they've proven for years to be very good at, NV5 could turn out to be one of the best growth stocks to own over the next decade.
Chuck Saletta has no position in any stocks mentioned. Jason Hall owns shares of ATVI and NV5 Global. Seth McNew has no position in any stocks mentioned. The Motley Fool owns shares of and recommends ATVI and Take-Two Interactive. The Motley Fool recommends Electronic Arts and Envestnet. The Motley Fool has a disclosure policy.