Investors who bought Netflix early and had the foresight to hold on to their shares are sitting pretty today. The chart below displays the company's share-price gains since its IPO in 2002 -- the type of performance that every stock picker would like to be able to predict:
Having substantial holdings in just one company with that type of performance is a life-changing event; the good news is that right now there are companies that are in the early stages of similarly incredible runs. Read on to learn why a panel of three Motley Fool investors identified Align Technology (NASDAQ:ALGN), Limoneira (NASDAQ:LMNR), and BofI Holding (NYSE:AX) as stocks that look primed to deliver incredible returns.
Banking for the internet age
Keith Noonan (BofI Holding): In order for a company to deliver returns that are comparable to Netflix's incredible performance since 2002, it would need to develop a product or service that's innovative and scalable. Bank of Internet Holding fits that bill and has the type of growth potential that could translate to tremendous capital appreciation for shareholders. As the name implies, the company is an internet-based bank -- one which operates no physical branch locations. That's an advantage that allows the company to keep expenses much lower than its brick-and-mortar-based competitors while also, in many cases, offering better loan rates for its members.
BofI Holding trades at less than 11 times forward earnings estimates and has a forward profit-to-earnings-growth ratio of just 0.6 -- metrics which suggest shares could be quite cheap at current prices. It's worth noting that the stock is heavily shorted, with some investors betting that the company will be dragged down by an ongoing money-laundering investigation or by having risky loans on its books. However, thus far, those concerns appear misplaced. Big short interest in the stock also creates the potential for explosive share-price gains if the company continues to emerge from the regulatory muddles and deliver strong earnings performance.
With a market cap of just $1.2 billion and a business model that should allow the company to scale rapidly, BofI Holding is a stock that has tremendous room to run, and one that could generate huge returns for investors who get on board early with its effort to revolutionize banking.
Straighten out your portfolio with this stock
Dan Caplinger (Align Technology): It's tough to come up with a good reason why video streaming and orthodontic alignment have something in common, but the success of Align Technology has built up positive momentum in a way that's reminiscent of how Netflix got started. Just as Netflix originally built its business on the idea of making DVDs available to customers, so too did most investors expect Align Technology to sell its Invisalign solely to adults for tooth-straightening work. Yet Netflix found further success in the next-generation area of streaming video, and Align Technology found that it could make its orthodontic technology available to children, opening up a much wider market for the company.
Align Technology has sought to widen its scope even further. Expansion into the international market has made whole new populations available for Align's products, while research and development activities have identified new applications that can make a broader set of patients eligible to use the company's innovations. Moreover, although Align Technology hasn't yet come up with ways to apply Invisalign to more severe tooth misalignment situations, the company is working hard to come up with newer versions of the product that would be suitable for those more challenging cases. All in all, Align Technology has a lot of growth ahead of it, making it look a lot like the younger Netflix.
Don't go sour on this stock
Rich Duprey (Limoneira): When life hands you lemons, make lemonade. That might as well be the motto of Limoneira, a leading producer of lemons, avocados, oranges, and specialty citrus fruits. It might seem odd comparing the movie-streaming giant to a fruit grower, but Limoneira is still in its early stages, and as demand for lemons continues to increase, the producer should see sharp sales growth in the future.
In particular, Limoneira has substantial acreage that will begin producing in each of the next few years, thus allowing its costs to drop further. In the just-released third-quarter earnings report, management said it has over 7,900 acres that are planted, of which about 1,500 acres are currently not producing fruit but are expected to become full-bearing over the next four years. And the company plans on planting an additional 500 acres of lemons in the next two years that will build out its long-term pipeline of productive acreage further. Higher lemon production, however, has been slightly offset by lower avocado production due both to the green fruit's biennial production cycle and weather-related events.
Limoneira also just entered into an agreement with orange producer Suntreat that will give it greater leverage in the retail chain. Currently grocers like Kroger want a full complement of citrus, so by partnering with Suntreat, Limoneira will be able to provide greater diversity of fruit.
Some 70% of Limoneira's global customer base are food service buyers, with the remaining 30% in the retail category. Suntreat's business is the exact opposite, so they play off each other. With analysts expecting Limoneira to expand earnings at a 25% clip over each of the next five years, this is a stock that could see tremendous growth reminiscent of Netflix.