Major market benchmarks hit new highs in early 2020 as a wave of optimism swept over the market. But sentiment can turn sharply at any moment, as investors are seeing recently with worries about the coronavirus outbreak, and conservative investors may be wondering whether it's worth the risk to own growth stocks right now.
Fortunately, there are stocks that give investors ways to profit from strong growth trends with less risk than what comes with other companies that tend to be considered growth stocks. SVB Financial Group (SIVB.Q 0.50%), AbbVie (ABBV 0.72%), and NextEra Energy (NEE 1.13%) all offer opportunities for low-risk investors to get long-term growth in their portfolios without losing sleep.
SVB Financial Group
Despite a run in the latter half of 2019, bank stocks continue to be valued well below the market as a whole. The financial sector sells at the lowest multiple of forward earnings of any of the S&P market sectors: 13.2 times compared with 18.8 times for the S&P 500 overall, according to Yardeni Research. Investors may be skeptical of the ability of banks to grow earnings in an environment with a flat or inverted yield curve, but SVB Financial, the parent company of Silicon Valley Bank, has growth opportunities fueled by the technology industries it serves.
SVB provides banking and financial services to entrepreneurs and clients, chiefly in the technology and healthcare sectors. The company has a private banking business primarily for wealthy individuals and a commercial banking business that extends loans to companies and serves private equity. This lets it take advantage of its access to the vibrant tech ecosystem in Silicon Valley. It also has a venture capital arm that invests in early-stage companies and profits from initial public offerings and mergers and acquisitions.
SVB's earnings per share grew 20% in 2019. The company had the same challenges with net interest margin that other banks had, but it still managed to grow net interest income by 11%, thanks largely to 17% growth in its loan portfolio. SVB grew its average client funds by 19% and increased core fee income 24% during the year. It's also been very successful in acquiring new clients, growing its client base at a 16% annualized rate over the last five years.
Despite the rapid growth and a 20% return on equity, which is twice the performance of some big money-center banks, shares of SVB Financial sell for under 13 times analyst estimates for 2020 EPS. This underappreciated, high-quality bank stock is a good way for risk-adverse investors to profit from growth of technology and life sciences without placing risky bets on individual emerging companies.
The healthcare sector is a good place for conservative investors to find stocks that have growth that holds up in economic downturns along with dividends. One stock that was kicked to the curb by the market last year but is still growing and making hefty dividend payouts is pharmaceutical giant AbbVie.
AbbVie is the maker of the top-selling drug in the world, Humira, but that tremendous positive has turned into a negative for investors as competition from biosimilars has started to eat away at sales. In the most recent quarter, revenue from Humira made up 58% of the company's total but fell 3.7%. The quarter was still viewed as a success by investors, though, as other winners in the company's portfolio put up big gains. Total revenue grew 3% to $8.5 billion, and adjusted earnings per share increased 9% to $2.33. For the first nine months of 2019, EPS was up 12% from the period a year before.
Also weighing on shares is investor concern about AbbVie's pending acquisition of Allergan (AGN). The deal had a huge $63 billion price tag, and Allergan (the maker of Botox) has had growth challenges of its own. But the deal makes sense as a way to dilute the effects of competition for Humira while the company works on next-generation immunology drugs to replace Humira and its biosimilars with more-effective treatments.
If you're thinking AbbVie is a dividend stock, you're right. The company recently hiked its payout by 10% to give the stock a 5.8% yield, a move that indicates confidence in continued strong cash flow and helps support the stock price.
But AbbVie is also a growth stock that's very cheap right now. Growth from the Allergan acquisition, next-generation immunology drugs, continued success of its blood cancer drugs, and a strong development pipeline will make up for portfolio losses and keep the company growing, albeit at a muted pace for a while. Analysts expect earnings to grow 6% in 2020, and shares sell at only 8.5 times the consensus EPS estimate for this year.
You wouldn't ordinarily consider utilities to be growth stocks, since they operate in a very heavily regulated industry. But NextEra Energy stands out in the sector as a company that has some of the conservative characteristics of a dividend-paying utility stock along with a strong growth component fueled by the renewable energy trend.
NextEra is made up of three main businesses: Florida Power & Light (FPL), the largest rate-regulated electric utility in the U.S.; Gulf Power, a smaller Florida utility that the company acquired recently; and NextEra Energy Resources (NEER), the world's largest generator of renewable energy from the wind and sun, and a major supplier of utility-scale battery storage. The regulated utilities provide steady and predictable cash flows while NEER is driving most of the growth with wind and solar installations in 36 states, Canada, and Spain.
For 2019, NextEra's adjusted EPS increased 8.7%. The company expects earnings growth for the next three years to be "near the top end" of its long-range growth goal of 6% to 8%. It also recently raised the dividend about 13% for a yield of 1.9%. NextEra's capital investments boosted FPL's contribution to adjusted earnings by about 6%, while new renewable energy projects drove 11% earnings growth from NEER.
NextEra's stock isn't as cheap as the other two picks, selling for 30 times analyst estimates for 2020 EPS, but investors have been virtually unwavering in their willingness to pay up for the company's predictable growth, as the chart below shows.
With a growing economy in Florida supporting NextEra's regulated utility businesses, a massive opportunity to build renewable energy installations in the U.S. and internationally, and a rock-solid balance sheet to support acquisitions, NextEra Energy is a nice choice for investors who want growth without drama.