Economic growth might be beginning to slow in the United States and around the globe, but that doesn't mean there aren't growth opportunities for investors who know where to look. The long-term potential of several megatrends, such as genetic testing services and modernizing financial payment systems in emerging markets, will hardly be stopped by a brief recession.
We recently asked three contributors at The Motley Fool for their best growth stocks to buy right now in early 2019. Here's why they chose NeoGenomics (NASDAQ:NEO), Mastercard (NYSE:MA), and Shopify (NYSE:SHOP) to inject a little growth into your portfolio.
An underappreciated genetic-testing business
Maxx Chatsko (NeoGenomics): After years of losses, more and more genetic-testing platforms are turning profitable. While the trend hints at a promising future for precision medicine and preventive healthcare, it doesn't seem to be getting the media attention it deserves. Genomic Health and NeoGenomics began delivering operating profits in 2018, while the younger Invitae and newly public liquid-biopsy pioneer Guardant Health saw their quarter-over-quarter operating losses shrink for the first time.
Of all companies in that group, NeoGenomics appears to be the least appreciated among investors. The under-the-radar business focuses on providing genetic testing services specifically in cancer diagnostics to both clinics and pharmaceutical companies. In the first nine months of 2018, it grew year-over-year revenue at about 12%, compared with 14% for Genomic Health. Yet the two stocks had very different outcomes last year: NeoGenomics shares rose 42%, but those of its peer leaped 88%.
The difference of a factor of two holds up in other valuation metrics between the two companies, with NeoGenomics trading at about half the price-to-sales ratio and half of the price-to-book ratio of its peer. But the mismatch doesn't appear to make much sense upon closer evaluation. The cancer-focused genetic-testing platform boasts a higher cost of product revenue because of the nature of the laboratory tests involved, but it avoids the costly sales and marketing expense of its peers because of its customer base. The result: NeoGenomics and Genomic Health delivered about the same operating margin -- and that should hold up as they continue to scale.
In other words, the current mismatch might suggest Genomic Health is overvalued or that NeoGenomics is undervalued. I think both companies will grow into healthier valuations over the long run, so the latter seems more fitting, given the trajectory of the numbers. Besides, in October, NeoGenomics acquired Genoptix for $125 million, a move that will add about $85 million in annual revenue once the deal closes, $25 million in annual cost synergies over time, and a 25% EBITDA margin after the first three years. With growth showing no signs of slowing, and an argument that shares are unfairly valued compared with its peers, NeoGenomics should be worth a closer look.
Check out the latest NeoGenomics earnings call transcript.
Strong earnings around the corner
Neha Chamaria (Mastercard): Mastercard has all the ingredients of a growth stock: It dominates the payments processing industry that's growing at a fast pace, has a proven business model, enjoys a solid economic moat and brand power, is backed by a visionary management team, and has delivered remarkable sales, earnings, and cash flow growth over the years.
You've probably used a Mastercard brand credit or debit card. What you might not know, though, is that Mastercard doesn't issue those cards but only facilitates transactions made using them over its payments processing network, in return for fees. So as the number of cards issued grows and the number of times they're swiped to make a purchase rises, Mastercard makes more money.
In effect, Mastercard's value rises as more people use its services and as its client base expands, which is a fine example of the "network effect" economic moat. Because it's also an asset-light business, Mastercard earns hefty operating margins and has been able to grow earnings and cash flows steadily year after year.
What are the chances that Mastercard co-branded cards will make greater inroads globally? Strong, I'd say. The World Payments Report 2018 from Capgemini and BNP Paribus estimates global non-cash transactions to grow at a compound annual rate of 12.7% between 2016 and 2022 after growing at 10.1% during 2015-2016. In other words, cashless modes of payments such as credit and debit cards and mobile wallets will back financial transactions in the years to come. As one of the world's largest payment processors, Mastercard stands to be a key beneficiary as digital payments gather steam. With Mastercard expected to report strong numbers for fiscal 2018 in the coming weeks, the stock is a great buy right now.
Check out the latest Mastercard earnings call transcript.
Cashing in on e-commerce growth
Chris Neiger (Shopify): Investors have seen Shopify's share price skyrocket 670% over the past three years, but the e-commerce platform company took a hit in December, as its shares slid 9%. Some are worried that Shopify's best growth days are behind it, but that seems like a premature prediction.
Consider that Shopify now has more than 600,000 merchants. That's an impressive amount on its own, and it's up from 500,000 merchants a year ago. In addition, Shopify's sales are growing strong, and third-quarter 2018 revenue increased by 58% year over year to $270 million. Overall revenue spiked thanks to a 68% sales jump in merchant solutions and a 46% revenue increase in subscription solutions, Shopify's two largest sales segments.
Some investors may be hesitant to jump in with Shpoify because its growth has made the stock relatively expensive. Its shares trade at 226 times its forward earnings and have a price-to-sales ratio of about 18.3. But keep in mind that the e-commerce market is just getting started. Last year the market was worth about $2.8 trillion, and it's expected to reach $4.8 trillion by 2021. Also, investors should remember that online sales accounted for just 10% of all retail sales last year and will make up under 14% in 2021. In short, we're still in the early days of e-commerce.
With a strong customer base already established, the company's key revenue segments performing well, and the e-commerce market still poised for much more growth, Shopify looks like a good long-term bet in the evolving e-commerce market.
Check out the latest Shopify earnings call transcript.