Led by explosive growth stocks in the tech sector, the stock market has generally recovered from the COVID-19 plunge of the spring. E-commerce stocks have also posted huge gains. It's hard to tell where the broader market will go from here, but some of the high-growth winners that lifted the market indices should have plenty of rocket fuel left in their tanks.
The tech sector's leadership of this trend is not subtle. Take a look at how the tech-heavy NASDAQ 100 index is crushing other popular market barometers this year:
The rising tide isn't lifting every boat. Some proven and promising growth stocks were left behind the surge I just showed you. But as of September, they look ready to break out with big gains from their relatively modest stock prices. Here's why you should consider adding Universal Display (OLED 0.44%), Vipshop (VIPS 0.28%), and 8x8 (EGHT -4.64%) to your portfolio right now.
1. Universal Display
This company holds technologies used in organic light-emitting diode (OLED) panels in a patent-protected iron grip. OLED screens are found in most flagship smartphones and tablets these days, along with a growing number of less expensive mobile devices and some top-shelf television sets. Leading manufacturing partners Samsung and LG Display are expanding their OLED production facilities while backing out of competing LCD standards. Universal Display is also chasing additional growth by researching a broader set of OLED patents and bringing OLED panels to commercial use in new markets, such as general purpose lighting.
This is a growth stock for the ages, but the stock is trading 14% lower in 2020. Economic stress from the COVID-19 pandemic put a lid on consumer demand for better smartphones and TV sets, and Universal Display's largest customers are running their manufacturing lines far below full capacity right now.
This, too, shall pass. Universal Display is poised to soar in 2021 and beyond as consumer markets get back on track. The company is profitable even in this dark period. Its balance sheet holds $644 million in cash equivalents, but zero long-term debt. The patent-plated gravy train will surely keep on rolling for years to come, and Universal Display's stock really shouldn't be stuck at prices first seen in the fall of 2018.
Image source: Getty Images.
2. Vipshop
Chinese e-commerce expert Vipshop has been flying under Wall Street's radar for years. The company runs a popular discount shopping site in China powered by partnerships with over 30,000 brands and a registered user base of 340 million active accounts. This is the third-largest e-commerce company in the Middle Kingdom, but the stock trails far behind larger rivals JD.com (JD 0.65%) and Alibaba (BABA 0.17%) in the long run:
Vipshop's focus on bargain-bin flash sales should serve it well in times of economic crisis. That thesis was challenged in August as Vipshop's second-quarter results came in below analyst expectations. Sales rose 6% year over year and management set up modest revenue targets for the third quarter. Vipshop's stock fell 19% that day.
Don't let that crash scare you away from owning Vipshop shares. Management wants to balance the company's growth with preserving its healthy profit margins -- a wise strategy that should set Vipshop up for a long period of solid bottom-line gains. That includes not making any unusually aggressive marketing moves in the third quarter, which is a seasonally light period of sales in any given year.
"The third quarter is traditionally a light season without promotional events, and it's also a light season for the apparel category," CEO Eric Shen said in the second-quarter earnings call. "We have higher and better expectations for the fourth quarter, where apparel ticket sizes are much larger."
Vipshop's shares are found in the Street's bargain bin right now, despite a bright outlook for the fourth quarter and beyond. Shen expects to widen Vipshop's market share in the fourth quarter through a combination of heavier consumer shopping volumes and several planned promotional projects in that quarter. Investors should look beyond the soft third-quarter outlook and expect strong growth in the second half as a whole.
3. 8x8
Cloud-based communications specialist 8x8 is accelerating its revenue growth in 2020, but investors are focused on its falling bottom-line trends instead:
EGHT Revenue (TTM) data by YCharts
The company's stock is trading 8% lower in 2020, mostly due to a humble slate of guidance targets in May's fourth-quarter report. The company presented the coronavirus crisis as a source of uncertainty, even though work-from-home policies are driving demand for 8x8's digital voice and video communication services around the world.
The company has become an enthusiastic reseller of the Microsoft Teams collaboration service after integrating 8x8 Voice into that platform. More than half of 8x8's largest contract in the first quarter with conversions of former Avaya (AVYA) clients. The phone systems company recently introduced the X Series portfolio of all-in-one communications solutions, which is a key component of both the Microsoft Teams integration and the conversions of established Avaya accounts.
"Sixty-eight percent of our customer base is on the X Series platform, up from 43% last quarter," CEO Vikram Verma said in the first-quarter earnings call. "Customers in key verticals, such as healthcare, manufacturing, public sector, and financial services, responded to the pandemic by purchasing X Series."
The X Series launch weighed heavily on 8x8's bottom line in fiscal year 2020, but Verma sees a clear path to profitability in the next fiscal year as his company slows down its infrastructure investments to focus on profitable growth.
"The company has transitioned from a mainly small business VoIP offering to a full-featured cloud communications platform that's moving upmarket," Verma said. "We're achieving economies of scale on our multiyear investments."
The share prices don't reflect any of 8x8's rosy long-term growth prospects right now. The buying window for 8x8 stock is wide open in my book.
