It's easy to get swept up in the excitement of a skyrocketing stock. Some of those bottle rockets are bound to keep shooting even higher, after all. But not every high-octane growth stock is a winner, and investors can be left holding the bag if the growth engines start to sputter.
To help you sort the potential winners from the spent gadflies, we asked a handful of Motley Fool contributors to share a hot take on some of the hottest stocks in today's markets.
Wrestling this stock's valuation to the mat
Rich Duprey (World Wrestling Entertainment): Investors are ready to rumble with World Wrestling Entertainment. The stock has quadrupled in value in 2018 on the basis of a new five-year distribution deal for its SmackDown Live with Fox and Monday Night Raw with Comcast's USA Network. The success of its direct-to-consumer streaming programming was also a hit, as paying subscribers grew 10% to 1.8 million.
WWE's second-quarter earnings report boasted its highest-ever quarterly revenue totals, some $281.6 million, while operating income doubled to over $21 million, leading the entertainment company to raise its full-year guidance. Importantly, the new broadcast deals won't hit the financial statements until next year, meaning growth is decidedly not baked into its numbers already.
But are they baked into the stock price? At $90 per share, World Wrestling Entertainment does trade at some rich valuations of more than 115 times trailing earnings and 68 times this year's estimates. Although analysts expect WWE to grow earnings 20% annually for the next five years, that growth rate is still valued at some eight times its price-to-earnings ratio, a pricey picture to be sure.
World Wrestling Entertainment may have body-slammed the markets so far this year, but at these levels, it's difficult to say you should tag-team its stock and buy shares now.
Here comes the sun
Anders Bylund (Enphase Energy): This unique play on the solar power market is having a roller-coaster kind of year. The stock is trading 67% higher year to date and has nearly tripled in value over the last 52 weeks. But Enphase investors have also seen their shares lose 18% of their value in the last month alone, trading a staggering 47% below their 52-week highs.
The recent weakness in this stock stems from market worries related to the trade wars between China and America. Enphase's next-generation power inverters were targeted in Trump's second round of trade tariffs, forcing management to consider ways to work around a 10% surcharge on shipments to the U.S. In the second quarter, 62% of Enphase's microinverter shipments headed into this market.
So investors expected Enphase's profit margins to suffer long-term damage from the tariffs, but the company is preparing alternative manufacturing lines in places like Mexico, Taiwan, and Malaysia. Large-scale production should be up and running in one or more of these locations within the next three quarters, cutting tariffs out of the equation while also lowering Enphase's total costs in the long run.
Don't forget that microinverters made in China can still be shipped into tariff-free regions like Europe and Asia, so the company is simply forced to expand its global manufacturing operations in a more diversified way. That's not necessarily a bad thing at all.
"It's going to be a win-win for us in the long term," said CEO Badri Kothandaraman in last month's second-quarter earnings call. I agree and expect Enphase to walk out of the tariff furor stronger than before. And I'm not alone. Motley Fool's own solar power expert, Travis Hoium, recently said that "[solar microinverter rivals] SolarEdge and Enphase are just beginning to scratch the surface of their potential."
In other words, the current market lull won't last long. Enphase's stock should get back to its not-so-old hypergrowth ways no later than 2019.
A retailer defying odds
Daniel Miller (Five Below): Five Below has defied gloomy brick-and-mortar trends that have sent many retail stocks spiraling to new lows. In fact, investors can't seem to get enough of the company, with shares up 96% year to date, including a blowout second quarter. Can the stock keep soaring, or is it time for investors to wait for a better entry price?
Five Below operates nearly 700 stores in the discount sector of retail with products ranging from $1 to $5 and spanning categories including sports, technology, room, crafts, and others designed to attract young adults. Unlike many brick-and-mortar retailers, the business has held up well against e-commerce giant Amazon, partly because of its lower price points and items that generate impulse buys from consumers.
Further, Five Below has delivered explosive growth to investors by expanding its store count. During the second quarter, Five Below grew its store count by 18.5% to nearly 700 stores, which leaves plenty of room for additional growth, as the company intends to reach 2,020 stores by 2020 and over 2,500 stores over the long haul. Another positive factor for Five Below investors is the death of Toys R Us, enabling the company to focus more shelf space on toys for the younger demographic it has proven adept at attracting to stores.
But the question remains: After a 96% year-to-date jump in price, is Five Below still a buy? It sure can be if you're willing to pay a hefty premium -- the stock trades at a price-to-earnings ratio of 58 and Morningstar.com analyst Zain Akbari has the company's fair value pegged at $76 per share, far below its current $130. Five Below has delivered excellent growth, has remaining upside, and has defended its business from Amazon thus far, but at such a hefty premium, investors would be wise to let the stock cool off before buying shares.