One of the basic principles of successful investing is to look beyond a stock's valuation and go for fundamentally strong companies with great competitive advantages and growth prospects that can drive the stock higher and higher in the long run. Such high-growth stocks have a knack for finding their way to newer peaks and command premium valuations, regardless of what the market thinks.
Three such stocks that successful investors can consider today are Trex (NYSE:TREX), Sherwin-Williams (NYSE:SHW), and Facebook (NASDAQ:FB). Here's what makes these three such great companies to invest in, according to our Foolish contributors.
Building a brighter future
Rich Duprey (Trex): A friend of mine just rebuilt his deck. The old pressure-treated one had been around for years and served him well, but it was rotting and in need of replacement. This time around, there wasn't even a question about it: The deck would be finished with Trex decking boards.
Durability, reliability, and lack of maintenance have made Trex the no-brainer choice for millions of homeowners. Trex decks may have higher initial upfront costs from the premium the company charges, but the lifetime costs of owning one outweigh the expense. Not to mention the annual upkeep.
The only problem with Trex stock has been investor expectations. In its most recent quarterly report, it reported revenue of $145 million and net income of $28 million, or $0.95 per share, both beating Wall Street forecasts of $144 million and $0.88 per share, respectively, but its stock got walloped anyway because second-quarter guidance of $160 million in revenue was only in line with expectations.
A premium company is often expected to beat and raise its outlook, and if it doesn't then the market gives it a shellacking. But that's good for investors who were looking for an entry point into a company that's been growing smartly over time. Trex trades at 26 times earnings, about in line with the overall market, and with analysts expecting it to grow earnings 25% annually for the next five years it looks like a stock that can provide a solid foundation to grow on.
A formidable combination of growth and income
Neha Chamaria (Sherwin-Williams): A paint and coatings manufacturer's fortunes might be tied closely to the health of the economy, but a well-managed, cost-efficient leader in the industry can find ways to grow even during difficult times. That's what makes Sherwin-Williams, a cyclical company, such a great stock to own. Sherwin-Williams not only emerged from recessionary periods and the housing bubble with flying colors but has also grown exponentially since.
Efficiency is the key to growth for cyclical companies. Two factors have strongly worked in Sherwin-Williams' favor: Its own store chain, which ensures better end-consumer experiences, and brand loyalty that has allowed the company to pass on higher costs to consumers without hurting sales. In just five years, Sherwin-Williams has boosted its operating margin by 50% to 15% and more than doubled its return on equity to over 70%. That's the kind of high-flying company you need for investing success.
Of course, it's difficult to predict whether Sherwin-Williams can grow just as phenomenally in the coming years, but there's no denying the company is poised to grow. My optimism stems from Sherwin-Williams' impending acquisition of Valspar, after which it'll become the world's largest paint and coatings company. That's a huge deal, and it should ensure rich returns for investors in Sherwin-Williams.
Let's also not forget that Sherwin-Williams is an incredible dividend stock. This dividend aristocrat has increased its dividend every year since 1979. The combination of growth and income is simply too hard to ignore.
Don't avoid this high-flying winner
Keith Noonan (Facebook): When managing your investments, there's sometimes a temptation to sell or avoid stocks that have been big winners and seek out underperforming companies that might have more upside potential. Peter Lynch describes this practice as "pulling the flowers and watering the weeds," and successful investors have probably seen that it's usually better to prioritize investing in great companies with significant competitive advantages instead of trying to predict the next big comeback story.
With that in mind, I think Facebook stands out as a high-flying stock that still has big things ahead.
Last quarter saw the company's earnings increase 76% year over year, and it looks to have room for continued growth thanks to impressive performance from its namesake website as well as its WhatsApp messaging service and Instagram photo-and-video platform. The company is one of the two dominant players in mobile advertising, and this strength looks to be a significant performance driver as more ad spending migrates online. In fact, last year saw Facebook and Alphabet account for nearly all of the growth in the global advertising market, and the social network's most recent quarter delivered a 51% year-over-year increase in ad revenue.
Even after shares have gained more than 350% over the past five years, Facebook still looks like a top stock for successful investors. With shares trading at roughly 30 times forward earnings estimates, the company might actually be dramatically undervalued compared with its long-term growth potential. n
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Keith Noonan has no position in any stocks mentioned. Neha Chamaria has no position in any stocks mentioned. Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Facebook, and Trex. The Motley Fool recommends Sherwin-Williams. The Motley Fool has a disclosure policy.