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3 Top Growth Stocks to Buy in February

By Nicholas Rossolillo – Updated Feb 6, 2020 at 7:34AM

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With revenues and free cash flows rising, these companies look poised to make today's premium share prices look like bargains.

After an epic near-30% surge last year, the stock market (as measured by the S&P 500 index) has taken a bit of a breather in recent weeks. Much of the current volatility in prices is likely due to the fact that earnings season for the fourth quarter is underway, but other factors like fear over the Wuhan coronavirus outbreak, the uncertainty inherent to presidential election years, and a general concern that the market may have gotten ahead of itself can also take shares of the blame.

That said, high-quality, fast-growth companies are always in style, especially after pullbacks. Three that fit that description -- and that did exceptionally well in 2019 -- are Veeva Systems (VEEV -0.19%), PayPal Holdings (PYPL -0.79%), and Skechers (SKX -3.85%).

All are poised for another good year in 2020. Let's find out a bit more about them.

A woman thinking. An illustrated thought bubble and bag of cash is drawn over her head.

Image source: Getty Images.

1. Veeva Systems: The cloud provider that's powering life sciences innovation

When it comes to cloud computing stocks, Veeva Systems usually isn't a top-of-mind pick for investors. The software outfit is focused on a specific industry niche (life sciences) and has a market cap of $22 billion -- and that's after the stock surged 57% in 2019.  

I think this high-growth outfit could gain more recognition among investors in the years to come, though. Veeva provides cloud solutions for companies in the biotech, pharmaceutical, and health and wellness space. However, its marquee product, Veeva Vault, is also making the jump from clinical-trial and drug-production data management to the chemicals, cosmetics, and consumer goods realm. That's significant as Veeva is all set to hit $1 billion in annual revenue for the first time this year, and the adjacent consumer goods markets it wants to enter are as large as the biotech and pharmaceutical fields it already operates in.  

The opportunities ahead for the company look massive. Revenues have been increasing steadily at rates above 20% annually for the last couple of years -- they're forecast to end 2019 up 26%, including two small acquisitions -- and adjusted earnings are expected to be 33% higher.  

And that's one of the best things about Veeva: It's already profitable. Not every high-growth cloud stock can boast the same. Free cash flow (revenue minus basic operating and capital expenses) is running at $423 million over the last year, a 40% year-over-year increase, and shares are trading at 52.6 times trailing-12-month profits. That's certainly a premium valuation, but one that's justified for a company expanding so fast and helping lead the charge in health technology.  

2. PayPal: A digital payments powerhouse that's rolling ahead

Making purchases electronically is by no means a new business model, but PayPal's digital peer-to-peer system has made deep inroads into the industry, and it's moving the needle in the global war on cash. With its namesake app and payment system, as well as Venmo and online coupon aggregator Honey Science, PayPal's advance has been relentless in the years since it parted ways with former parent eBay

In 2019, active accounts using a PayPal service increased 14% to 305 million, and the number of transactions processed rose 25% to 12.4 billion. Venmo alone had a huge year, processing $102 billion in payments in 2019, a 65% increase from 2018. All of this added up to a 15% rise in revenue -- and that includes about a 3.5% negative impact from the sale of its consumer credit business to Synchrony Financial. Though the top line was relatively sluggish, higher profit margins and share repurchases led to a 28% surge in adjusted earnings per share.  

PayPal continues to announce new payment agreements with partners around the globe, and the recent Honey Science acquisition will deepen the company's roots in e-commerce. It is anticipated that in 2020, revenue and adjusted earnings will grow by at least 17% and 9%, respectively, inclusive of the Honey takeover. Not a bad follow-up to 2019's 29% stock advance.  

As of this writing, shares trade for 33.3 times trailing-12-month free cash flow -- making PayPal another premium-priced stock, but one worth paying up for as its digital payments platform continues to roll.

3. Skechers: An upstart shoemaker winning overseas

When global consumers think shoes, the world's largest shoemaker Nike (NKE -1.55%) is often the company that comes to mind first. But Skechers has proven there's room for more than one international sneaker superstar. In fact, the quirky brand's retro kicks, its focus on celebrity and retired athlete endorsers (in contrast to the active-athlete mega-endorsement strategy of Nike), and its value pricing have led to some impressive growth. The fruits of its expansion efforts have been on grand display, especially in international markets.

Through the first three reported quarters of 2019, Skechers' revenue and adjusted earnings were up 9% and 15% respectively. Most of that was thanks to a double-digit percentage rise in overseas sales --  the segment notched a 22% growth rate in Q3 2019 and accounted for 59% of total sales. Emerging markets have been a key area of strength as Skechers has been building a name for itself among the growing middle classes in developing countries. In fact, its international growth rate far outpaces those of its larger peers. Nike, for example, put up a mid-single-digit international growth rate in its last quarter; foreign sales provided 56% of its total revenue.

My favorite bit about this company, though, is how Wall Street misunderstands its growth strategy. Expanding into new markets costs money, as it requires new stores, distribution channels (both physical and online), advertising, and warehouses. The lumpy increases in Skechers' expenses required to support its overseas expansions have sent its share prices on a wildly bumpy ride. The stock did rally 89% in 2019, but it's only up 90% over the last five-year stretch due to all that volatility -- even though free cash flow has surged 250% higher in that span of time.  

I fully expect the ups and downs to continue as expense growth is likely not over, but this shoemaker looks like a good buy for the long haul. Shares trade for just 21 times free cash, even though double-digit percentage growth on the bottom line is expected over the long term.

Nicholas Rossolillo and his clients own shares of PayPal Holdings and Skechers. The Motley Fool owns shares of and recommends Nike, PayPal Holdings, Skechers, and Veeva Systems. The Motley Fool recommends eBay and recommends the following options: long January 2021 $18 calls on eBay and short January 2021 $37 calls on eBay. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Skechers U.S.A., Inc. Stock Quote
Skechers U.S.A., Inc.
SKX
$33.92 (-3.85%) $-1.36
Veeva Systems Inc. Stock Quote
Veeva Systems Inc.
VEEV
$162.57 (-0.19%) $0.31
PayPal Holdings, Inc. Stock Quote
PayPal Holdings, Inc.
PYPL
$86.97 (-0.79%) $0.69
NIKE, Inc. Stock Quote
NIKE, Inc.
NKE
$97.02 (-1.55%) $-1.53

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

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