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3 Top Growth Stocks to Buy in May

By Danny Vena, Rich Duprey, and Timothy Green - May 8, 2018 at 6:15AM

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Investors looking for growth opportunities should consider a footwear company, a deep-discount retailer, and an online seller.

The onset of spring and the inevitable growth that follows is a reminder that now can also be a great time to plant seeds that will blossom into successful long-term investments. But with so many growth stocks to choose from, how's an investor to know which companies are poised to be the winners of tomorrow?

Fortunately, we have three Motley Fool investors willing to help with that. We asked them to choose top companies that they believe will provide significant growth. They offered convincing arguments for Skechers (SKX -0.81%), Five Below (FIVE -0.39%), and Amazon (AMZN 3.15%).

Stacks of gold coins and plants growing in soil, with a green, upward pointing graph arrow.

Image source: Getty Images.

A growth stock on sale

Tim Green (Skechers): Growth stocks are often expensive, trading for dozens (or hundreds) of times earnings, or many times sales if the company is drowning in red ink. As much more of a value investor than a growth investor, I shudder at the idea of paying obscene prices for fast-growing stocks. Most of the growth stock universe is well outside my comfort zone.

But one example of a growth stock that isn't trading like a growth stock is Skechers. Shares of the footwear company were hammered after a disappointing first-quarter report last month. While Skechers' results were fine, the company's guidance called for a slowdown in both revenue and earnings growth. That spooked investors enough to erase about one-third of the company's value.

SKX Chart

SKX data by YCharts.

Here's the thing: Skechers is now trading like it's not growing at all. Backing out the net cash on the balance sheet, the stock trades for less than 12 times the average analyst estimate for 2018 earnings. That's despite the fact that the company is still expecting to grow revenue by around 10% next quarter. Skechers' growth could slow down further, like it did in late 2016 and early 2017. But I don't see a reason to believe that the company's best days are behind it.

Growth stocks don't often trade at rock-bottom prices. Take advantage of the market's overreaction and pick up some shares of Skechers this month.

A retailer that's just heating up

Rich Duprey (Five Below): Now is a perfect time to buy into deep-discount retailer Five Below after its stock hit record highs last month, only to pull back by about 10%. This is only a pause before the store that sells everything for $5 or less resumes its prior growth trajectory.

Five Below has found the perfect niche for tween customers, latching on to "trend right" products and marketing the heck out of them. From Silly Bandz to fidget spinners, Five Below finds the inexpensive products that kids get excited about and can also afford.

Five Below storefront with motto -- hot stuff, cool prices.

Image source: Five Below.

Adjusted fiscal fourth-quarter sales jumped 26% and comparable store sales rose 6%, even though there was no major fad toy on the market. It's able to do this because the big trend item introduces new customers to Five Below, who then want to come back and continue making purchases. It's a unique treasure hunt model that hasn't been successfully replicated by competitors, giving Five Below a bit of a wide moat.

Now the deep discounter trades at 39 times trailing earnings and 24 times next year's estimates, which makes it look pricey for a retailer, especially a deep discounter. However, the potential for Five Below comes from its ever expanding retail footprint, as 80% of its annual growth comes from new stores. Management believes it can support 2,500 stores, some four times the 625 locations it currently operates, so that while investors may have hoped for more from the retailer's guidance for the coming year, it's certainly possible Five Below could surprise them with a strong earnings beat this year.

Danny Vena (Amazon): When it comes to growth stocks, no company typifies this better than Amazon. The company is tapped into three distinct growth markets that it dominates. Even more impressive is that Amazon was a pioneer in each area.

While the company may not have invented the concept of e-commerce, it was an early innovator and became the poster child for how to succeed in online sales. Amazon is the clear leader in the trend it helped to popularize.

Couple lying on the floor at home entering credit card information using a laptop.

Image source: Getty Images.

While you might be concerned that you missed the boat on this trend, fear not. For the fourth quarter of 2017, U.S. e-commerce accounted for only 8.9% of total retail sales, up from about 3.5% a decade earlier. While online sales will never account for all or even the majority of retail purchases, it still has a long runway, and Amazon is the clear leader, having captured as much as 44% of online sales in the country last year -- and 4% of all U.S. retail. The company has only just begun to tap its international opportunity.

Another vast and growing trend that Amazon leads is the undeniable move to cloud computing. What began as a side business has morphed into the company's greatest producer of profits. Last year, the segment contributed 10% of Amazon's revenue and all of its operating income -- and some believe the business could triple over the next five years.

An offshoot of the company's artificial intelligence efforts has taken the country by storm and is now being expanded worldwide. Amazon's Echo line of smart speakers has proved to be a Trojan horse in the homes of Amazon customers. While the devices are used for things like games, music, and news, they can also be used to place orders and reorders from Amazon's online store. Early research has shown that Echo owners tend to spend $1,700 annually in purchases, 66% more than the average customer, according to Consumer Intelligence Research Partners.

With three significant and accelerating growth drivers, now is the time to plant your seeds with Amazon.

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Stocks Mentioned, Inc. Stock Quote, Inc.
$109.56 (3.15%) $3.35
Skechers U.S.A., Inc. Stock Quote
Skechers U.S.A., Inc.
$35.29 (-0.81%) $0.29
Five Below, Inc. Stock Quote
Five Below, Inc.
$112.99 (-0.39%) $0.44

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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