The markets have rebounded strongly over the last six months but there are still great companies worth buying. Here are two growth stocks that should outperform the broader market from here.
Amazon: Riding explosive e-commerce growth
Amazon (AMZN 2.42%) has experienced extremely high demand during the pandemic, with year-over-year net sales growth accelerating to 40% in the second quarter. Amazon's recent performance reinforces how valuable its services are to customers, especially as consumers increasingly turn to e-commerce.
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The Prime membership program is the key that keeps customers so loyal to Amazon's ecosystem of services, spanning grocery delivery and entertainment. Amazon cited strong Prime member engagement trends throughout the recent quarter, with members shopping more often with larger basket sizes. Video streaming hours doubled year over year, driven by Prime Video.
High demand across the business, which also includes its fast-growing Amazon Web Services (AWS) cloud business, contributed to a 27% year-over-year increase in trailing-12-month free cash flow reaching $31.8 billion. Amazon's cash-generative business provides the fuel to deliver more growth, especially internationally, where Amazon is investing to expand Prime benefits to customers. It seems to already be paying off, with higher international demand delivering a surprise operating profit for the segment of $345 million in the second quarter. This will likely be a temporary profit spurt, as management continues to invest to expand its international presence, particularly in India.
This growth stock has delivered monster returns over the years, and investors are willing to pay a premium price tag for Amazon's future growth prospects. Amazon has always looked expensive on a price-to-earnings basis, but it's worth noting that the stock still trades within its historic range on the basis of price to cash from operations per share. Amazon is still a buy at these levels.
AMZN Price to CFO Per Share (TTM) data by YCharts
Five Below: A fast-growing discount chain
The rise of Amazon doesn't mean brick-and-mortar retail is dead. Five Below's (FIVE 0.21%) share price has soared 266% over the last five years, showing that the right retail concept can still deliver big returns. Five Below has carved itself a profitable niche by selling a range of items across toys, candy, tech, beauty, and even loungewear, for $5 or less.
Growth has been impressive. Over the last five years, the top line has more than doubled, but at only $1.69 billion in trailing-12-month sales, Five Below has plenty of room to expand. Five Below ended the last quarter with 982 stores, and it also has a growing e-commerce business that currently makes up a low single-digit percentage of total sales. Management believes it can open more than 2,500 stores over the long term.
The pandemic hurt Five Below, given most of its sales are dependent on store traffic. Sales were down 45% year over year in the fiscal first quarter, causing the stock price to fall earlier this year. But Five Below is already on the road to recovery, with sales up 2% in the fiscal second quarter. For stores that were open during the last quarter, comparable sales, including e-commerce, increased approximately 6%.
One of the best aspects of Five Below's growth strategy is that it's flexible with its merchandise assortment. It excels at sourcing a wide variety of items on the cheap, which allows it to deliver extreme value to customers -- something many people will appreciate during a recession. To address customer needs during the COVID-19 crisis, Five Below stocked hand sanitizers, wipes, and face masks, in addition to personal care goods, and even items for pets.
Five Below is more than a discount seller of toys and candy for kids. The more it pushes into new categories like clothing, its addressable market opportunity will only expand, which is ideal for growth investors looking for a stock that can continue delivering returns over many years.
The stock looks expensive, trading at a P/E of 73, but that's partly due to the recent decline in earnings resulting from the store closures. The share price has bounced back and is trading near its pre-COVID-19 highs. Five Below has a long runway of growth ahead and should be a rewarding investment.
