When the COVID-19 pandemic shook the world this year, investors didn't follow the typical playbook for declining markets.
Ordinarily, money would flow to investments perceived as lower risk: bonds, dividend stocks, or "value" stocks selling at low multiples of sales, earnings, or assets. In 2020, however, investors seemed to realize that the situation presented an opportunity to buy stocks of businesses with solid growth prospects.
Investing in and holding stocks that are revolutionizing their industries can make you rich. Not all of these companies succeed, but having some shares of ones that do can make up for many mistakes in a portfolio. Patience is an essential investor attribute. The shares of these stocks often look overvalued by conventional measures, and there are often setbacks that scare skittish investors out of the best opportunities.
Here are three companies that aspire to disrupt their markets. None looks cheap by sales or earnings, but one or all could deliver big returns in the long run.
Image source: Getty Images.
Five9
Traditionally, call centers consisted of rows upon rows of cubicles with agents in headsets. Five9 (FIVN 0.23%) is changing the industry with cloud-based software that allows agents to operate out of smaller distributed workspaces or even from home.
Five9 sells a software-as-a-subscription (SaaS) platform called Virtual Contact Center that enables organizations to build scalable and flexible organizations for service, sales, and marketing customer interactions. Agents only need a headset, a computer, and a broadband internet connection. They can work anywhere in the world. The company has integrated its solution with offerings from larger customer relationship management companies such as Salesforce, Microsoft, Zendesk, and ServiceNow.
Five9 has been growing rapidly. The pandemic accelerated results, with businesses large and small scrambling to improve online communication with customers and to allow employees to work from home. Revenue grew 34% in the most recent quarter, compared with 27% growth in 2019, and results thrashed analyst estimates on both the top and bottom lines. The company also recently announced that it's buying a partner that supplies the artificial intelligence (AI) technology for its Intelligent Virtual Agent, a product that replaces the frustrating "press three for sales" phone tree experience with one that relies on interaction in natural language.
The company sits at the intersection of several powerful trends: digital transformation, work-from-home policies, cloud-based SaaS, and AI. It should thus have a long runway ahead of it. Shares have pulled back 13% in the last few days.
Novocure
Cancer treatments have been changing rapidly in recent years, but up to now, the approaches have boiled down to surgery, radiation, and drugs. Novocure (NVCR 2.36%) has developed a fourth approach using electric fields to destroy cancerous tumors. After 20 years of work on the technology, the company is winning acceptance for it and turning the corner of profitability.
Novocure has achieved regulatory approval for treating glioblastoma and mesothelioma. The company believes that the mechanism behind tumor treating fields is broadly applicable to treating a wide range of tumors. Pivotal phase 3 trials are underway for metastatic lung cancer, non-small cell lung cancer, pancreatic cancer, and ovarian cancer. The company also has midstage trials in liver cancer and gastric cancer, and is conducting pre-trial research on 10 others.
Expanding the cancer types that Novocure's devices treat isn't the only way the company can grow its patient base. It's testing them in combination with radiation and immunotherapy drugs. It's also improving the technology to increase effectiveness and ease of use. Novocure also has plenty of room for geographic expansion and recently entered the Chinese market.
Novocure reported revenue growth of 44% in the third quarter and a GAAP profit for the fifth straight quarter. The number of active patients increased 22% year over year and 3% from Q2. Revenue growth probably won't continue at that blistering pace next year since the company is getting a boost from a backlog of Medicare claims in 2020. Still, expansion of the top line could easily exceed 20% for the foreseeable future, and clinical trials for new cancers could generate a steady flow of news next year and beyond. Shares aren't cheap at about 30 times sales, but stocks of revolutionary companies seldom are.
Generac
It might seem strange to consider an industrial equipment company that's been around for over 60 years as revolutionary. Generac Holdings (GNRC 0.79%) makes backup generators, a business that's been booming thanks to the fragility of the country's electrical grid in the face of wildfires in the West and hurricanes in the South. The company has even bigger aspirations to profit from "Grid 2.0," a new model of distributed power generation and management that's trending in the utility industry.
Generac has used its position as the leading supplier of home backup power generation to move into whole-home battery backup, selling solar-and-storage systems capable of powering entire homes during outages. The systems are similar to what Tesla offers, but Generac is going for higher power and higher capacity. It's also leveraging its experience in load management to deliver improvements, like prioritizing essential appliance operation during an outage.
The clean energy market is a major adjacent market for Generac, but it's after even bigger opportunities as a grid services manager. All those commercial and residential generator systems represent power generation capacity that sits idle except during outages. That unused capacity could be turned on to bolster the grid during peak demand periods, or when renewable energy sources are producing less power. Owners of standby generators could use them as income sources if they were coordinated with the grid and collectively managed as a "virtual power plant." To this end, Generac last month acquired Enbala Power Networks, which makes software to manage distributed energy resources.
Even if it takes years for Generac to achieve its ambitious goals, investors will likely still profit from booming demand for the company's standby power products, making the stock a solid growth pick for the post-pandemic world. An aging power grid, utility shutdowns in California, and even an increased need for standby generators for 5G cellular infrastructure powered Generac's revenue up 17% and GAAP earnings per share up 54% in the most recent quarter. Shares are up 118% this year and have been setting all-time highs.