To be a successful growth stock investor, it's important to look beyond the trendiest growth stocks that are constantly in the headlines. With that in mind, here's why our investors believe BofI Holding (NYSE:AX), iRobot (NASDAQ:IRBT), and A.O. Smith (NYSE:AOS) are three under-the-radar growth stocks that all long-term investors should take a closer look at.
This nontraditional bank could have lots of room to grow
Matt Frankel (BofI Holding): In many ways, BofI Holding operates like a traditional savings and loan. The bulk of the company's business involves taking in deposits in the form of checking accounts, savings accounts, and CDs, and lending out money to qualified customers. However, there's one big difference between BofI and most other banks -- the bank has no physical branches whatsoever.
This gives it a major cost advantage over its peers and allows BofI to run one of the most efficient banking operations in the business. BofI consistently earns fantastic returns on equity and assets and runs at an unheard-of efficiency ratio.
Over the past five years, BofI, which stands for "Bank of Internet," has grown tremendously. Assets, net interest income, and earnings have all more than tripled. At the same time, the bank's credit quality has improved and the bank has successfully transitioned from a CD-oriented institution to a more traditional checking and savings-based model.
Despite the tremendous growth, BofI could still have lots of room to grow. For one thing, with about $8.5 billion in assets, BofI is still rather small as far as banks go. For context, this is less than 0.5% of the assets of the largest U.S. banks. Plus, BofI has several untapped revenue streams it plans to capitalize on, such as auto lending and unsecured personal lending. And with a valuation on par with institutions like JPMorgan Chase and Wells Fargo, I think it's fair to say that the market isn't pricing in the bank's vast growth potential.
Growing into the future
Sean O'Reilly (iRobot): One of the staples of any sci-fi story is robots. And the company helping make everyday robotics a reality, and managing to put up some substantial growth numbers while it does so, is iRobot.
The company is the current market leader in the emerging consumer robot industry. Its Roomba robotic vacuum is one of the most popular consumer robots on the planet.
iRobot has a long history of robust growth. Its third-quarter results, released Oct. 18, were true to form. Revenue for the quarter jumped 22% year over year, not bad for a technology hardware manufacturer. The company is also global, selling its products in the U.S., Japan, and Europe, the Middle East, and Africa (EMEA).
Demand for its products continues to grow in the U.S. and EMEA regions. On the Q3 conference call, management projected 40%-45% growth in the United States.
EPS estimates for the full year were ratcheted up as well. Management initially said it expected full-year 2017 EPS to come in between $1.35 and $1.70. That has been upped to a range of $1.65-$2.00.
iRobot's growth is set to continue chugging along for years to come. As its CEO noted as part of the Q3 release, robotic vacuum cleaners have penetrated less than 10% of U.S. households. The figure is far lower abroad. And that's to say nothing of its mopping and pool-cleaning robotic offerings.
With a long history of growth and profitability and a long runway of growth ahead, iRobot is a must-consider growth stock.
The next big growth engine
Reuben Gregg Brewer (A.O. Smith): A.O. Smith took advantage of the huge opportunity in China, getting an early start in this massive developing nation. Sales in China grew at a compound annual rate of 22% over the 10 years through 2016. And the uptrend isn't over just yet. China makes up roughly 95% of A.O. Smith's foreign business, which accounts for around 35% of total revenue. Those growth numbers may surprise you, since the company's main product is the lowly water heater.
While you and I may take hot water for granted, it's far less common in emerging markets. And as the people in these countries step up the socioeconomic ladder, they're happy to spend the money needed to get this modern-world privilege into their homes. A.O. Smith is there to help satisfy their demand. But the China story is old news; the next big thing is India. The game plan is to take the lessons learned from China and apply them to the next big Asian opportunity.
The company's core markets are in North America, which are mature. But I expect continued expansion in China and an acceleration in India to keep A.O. Smith on the growth path and allow it to continue raising its dividend, which has been increased for 24 years in a row at this point -- posting an annualized growth rate of 15% over the past decade. Successful investors look past the sexy headlines to find unique opportunities; A.O. Smith's boring water heaters fit that bill.
Matthew Frankel has no position in any of the stocks mentioned. Reuben Gregg Brewer has no position in any of the stocks mentioned. Sean O'Reilly owns shares of iRobot. The Motley Fool owns shares of and recommends BofI Holding and iRobot. The Motley Fool has a disclosure policy.