Savvy investors are always keen on finding the next big growth stocks. That's because growth stocks have been the biggest driver behind the stock market's massive gains over the last decade. While the S&P 500 is up about 326% since the market bottom during the financial crisis, growth stocks have done even better, as the iShares Russell 2000 Growth ETF, an index of small-cap growth stocks, is up 437% in that time. You've probably heard of the FANG group of tech stocks, which have done even better.
A bargain pot stock
George Budwell (OrganiGram Holdings): Canadian pot stocks have been racing higher in anticipation of the legalization of cannabis for recreational purposes in the country this month (Oct. 17, to be exact). This explosive growth has caused the valuations of most companies operating in the space to reach mind-boggling levels -- levels that are arguably unsupported by their near-term fundamentals. OrganiGram, however, is one clear exception to this general trend.
OrganiGram stands out from the crowd for three overarching reasons. First off, the company employs a three-tiered growing system that gives it one of the most efficient operations in Canada. By production capacity, for example, OrganiGram should leapfrog into the top five companies by this time next year. This unique system thus allows the company to punch well above its weight and compete on an even keel with most of the industry's biggest names.
The second reason is that OrganiGram has kept its balance sheet in decent shape during its hyper-growth phase. Unlike most of its closest competitors that have taken on boatloads of debt to purchase new facilities, OrganiGram had only $74 million in outstanding debt at the end of the last quarter.
That amount shouldn't impede OrganiGram's growth in any meaningful way. After all, the company's top line is projected to rise exponentially over the next five years. The same simply can't be said for most of OrganiGram's fellow pot growers and distributors north of the border.
Lastly, OrganiGram is a downright bargain compared with the broader field of Canadian pot stocks. At about seven times forward-looking sales, OrganiGram's stock is expensive in the traditional sense, but that valuation is a steal when viewed in the context of the industry as a whole. Tilray, for instance, has been trading at over 90 times its estimated 2019 sales for most of the last month.
All that being said, OrganiGram's stock isn't for the faint of heart. The marijuana industry is facing a number of headwinds that could result in slower-than-expected growth and OrganiGram doesn't have a whole lot of breathing room, financially speaking. But if you're looking for a vehicle to gain exposure to this emerging industry, OrganiGram should probably be on your radar right now for the reasons stated above.
A fast-growing Chinese video platform
Keith Noonan (iQiyi): Chinese streaming company iQiyi's stock is still up roughly 50% from its March IPO, but rising content costs and concerns about competition from Tencent and Alibaba have pushed the stock well off its highs. Shares are down roughly 40% from their peak in July, and risk-tolerant investors willing to weather some volatility have an opportunity to establish a relatively early position in a stock with big growth potential.
iQiyi was launched by Baidu, the company behind China's leading search engine, in 2010 as an ad-supported video platform that could also tie users into its broader ecosystem -- similar to the role that YouTube plays for Alphabet. Ads still account for more than the majority of the company's sales (roughly 42% as of last quarter), but iQiyi has been pivoting to a more subscription-focused business to drive growth.
Adding the type of content that users are wiling to pay for hasn't been cheap (operating costs rose 41.5% in the June quarter), but iQiyi's offerings are successfully attracting new paying users -- with a 66% increase for member services revenues last quarter helping push overall sales up 51%. The company listed 67.1 million subscribers at the end of last quarter, up from the 5 million paying members it had in May 2015.
IHS Markit estimates that total annual revenue derived from streaming video platforms will have increased from $3.2 billion in 2015 to roughly $14 billion in 2020. iQiyi will have to contend with Tencent's and Alibaba's respective platforms, but the fast-growing Chinese streaming market should be able to support multiple video platforms, and the favorable long-term outlook for the industry and growth of the country's middle class suggest the streaming offshoot could be a big winner.
A name you know for a price too low
Jeremy Bowman (Facebook): There's no doubt that 2018 has been a rough year for Facebook. The social networking giant has suffered through the Cambridge Analytica scandal, CEO Mark Zuckerberg's subsequent congressional testimony, a record stock drop after a profit warning in its most recent quarterly report, the resignation of the two Instagram founders, and another data breach exposing 50 million user accounts.
All that bad press seems to have scared away investors, as the stock is down 11% this year compared with an 8% gain for the S&P 500. However, Facebook the business is as strong as ever. After all, the company essentially has a monopoly in social media with properties like Facebook and Instagram, and puts up massive growth numbers on the top and bottom lines every quarter, like clockwork. It's a growth stock that is being treated like a value stock with a price-to-earnings ratio of just 24.3, which is basically even with P/E of the market at 23.6.
In other words, the challenges and risks facing Facebook are already priced in and then some. Analysts still see the company's earnings per share growing by 16% next year, and they have historically underestimated the company's growth potential. What unnerved investors in July was the company's warning that operating margins would fall to the mid-30s next year, down from 50% last year as the company invests in the business to shore up security issues and add new products and as the developing world, where ad rates are lower, makes up a larger part of its business. However, most companies would kill for an operating margin in the 30s.
And Facebook's low share price and its $43 billion in cash on the balance sheet give the company a good opportunity to accelerate share buybacks, which would boost earnings per share.
The bottom line here is that Facebook's recent image problems should eventually pass and the company still has plenty of growth opportunities remaining, like new Facebook products; growth in Asia and the developing world; Instagram; and WhatsApp and Oculus, which have barely been monetized. With its massive networks, its products are among the stickiest in business today, and its platform is immensely valuable to advertisers. Facebook's growth is not about to disappear. The stock could easily surge if the company hops over a low bar in its earnings report later this month.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. George Budwell has no position in any of the stocks mentioned. Jeremy Bowman owns shares of Facebook. Keith Noonan owns shares of iQiyi. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Baidu, Facebook, and Tencent Holdings. The Motley Fool recommends iQiyi. The Motley Fool has a disclosure policy.