With its stock price up 150% over the past five years, salesforce.com (CRM -0.57%) is a hard act to follow. Finding a stock, let alone three, with the potential to outperform it is no easy feat. But that's what we charged three of our investors with, and they've chosen Microsoft (MSFT -1.27%), United Rentals (URI -0.72%), and The Chefs' Warehouse (CHEF 0.75%) as likely candidates to leave salesforce.com behind in the years ahead.
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Up, up, and away
Tim Brugger (Microsoft): It sounded great when CEO Satya Nadella announced Microsoft's new "cloud-first, mobile-first" initiative nearly three and a half years ago. But as in all such endeavors, what matters is the ability to fulfill the vision -- and Microsoft is certainly delivering.
At an annual run rate of over $18.9 billion, Microsoft may well be the leading cloud provider in the world. Not only does the cloud represent tremendous upside, but, as Nadella planned, it is driving jaw-dropping sales of the technology giant's numerous software-as-a-service (SaaS) offerings. Azure, Microsoft's cloud platform, enjoyed a 97% jump in revenue last quarter -- and that may not be the most impressive aspect of the company's performance in the period.
Productivity and business-process revenue climbed 21% to $8.4 billion and continues to make up a larger portion of Microsoft's total sales, which rose 13% to $23.3 billion last quarter. Dynamics 365 CRM, delivered via the cloud, jumped 74%, and the much-maligned Bing search was up 10% year over year.
At 2.15%, Microsoft's dividend yield is certainly not the highest in the market, but it certainly beats salesforce.com's zero. And with so many growth drivers at its fingertips, let alone directly competing with its sometime partner, sometime rival in CRM via its burgeoning Dynamics line of software, Microsoft is staring at an awfully bright future.
With a return of "just" 137% over the past five years, Microsoft hasn't quite matched Salesforce. But with continued growth in the cloud, Internet of Things, augmented reality, and artificial intelligence, to name but a few areas the tech giant has entered, Microsoft will likely catch and eventually outperform Salesforce over the next five years.
This stock's growth potential is hard to ignore
Neha Chamaria (United Rentals): United Rentals shares absolutely crushed the market last year, and it isn't hard to see why -- President Donald Trump's campaign promises of rebuilding America's infrastructure were enough to fuel the hopes of investors in the construction-equipment rental company. The stock is, however, struggling to maintain momentum, having lost nearly 14% of its value in the past six months. But if United Rentals' recent bumper quarterly numbers are anything to go by, there's every chance the stock could whip up solid returns going forward.
Last month, United Rentals reported 8.5% higher earnings per share for its second quarter, backed by a 13.5% year-over-year jump in rental revenue. Encouraged by strong ongoing demand for equipment, management upgraded full-year revenue guidance to $6.25 billion-$6.4 billion, representing nearly 10% upside at the midpoint from last year's revenue level. Furthermore, management expects to generate strong free cash flow, to the tune of $825 million-$925 million, this year.
Between its strong operational standing and a potential uptick in infrastructure spending in the U.S. in the wake of Trump's signing an executive order to expedite infrastructure-project approvals, United Rentals' stock appears to have solid upside potential. More so because at a trailing P/E of 16, United Rentals is trading at a significant discount to its five-year metric, as well as the industry average. For long-term investors, this could prove a great entry point even as the leader in the equipment rental space positions itself to ride an upturn in the construction markets.
Cooking up a growth opportunity
Rich Duprey (The Chefs' Warehouse): Restaurants are feeling the heat from declining customer traffic as price deflation at the grocery store makes eating in more economical than dining out. Amazon.com's acquisition of Whole Foods Market will only add to the pressure, but one company that seems to be able to withstand the heat of the kitchen is The Chefs' Warehouse, a specialty-food supplier to independent restaurants, fine dining establishments, hotels, culinary schools, and the like.
If anything is going to allow restaurants to stand out, it will be distinctive and unique center-of-the-plate specialties that will get a diner's notice, and The Chefs' Warehouse, which provides just such fare, is finding its offerings catching on.
In the company's second-quarter earnings report this month, revenue growth accelerated to 14%, reversing a year-ago loss. The fine-foods distributor posted a $3.7 million profit, while enjoying 10% organic sales growth. It's still struggling to keep expenses in check, so margins weakened a little in the quarter, but the company predicts the investments it's made in its infrastructure will eventually rein expenses in.
The Chefs' Warehouse sees opportunities to expand into chain restaurants, too. That's quite possible as the struggles they're facing now could be ameliorated to a certain extent with hard-to-find dishes the distributor could provide. The Chefs' Warehouse has also been in the direct-to-consumer market since a 2013 acquisition, and doesn't seem fazed by the possibility of Amazon entering the meal kit delivery market, especially after the Whole Foods purchase. Since The Chefs' Warehouse offers high-end dishes, it's probably right in thinking that the threat is minimal.
A highly competitive restaurant market would probably benefit the specialty distributor, so The Chefs' Warehouse could cook up some impressive growth numbers in the future.
