Long-term investors are always looking for stocks that are poised to climb over the next decade. These investors have several criteria they rely on to help in their search, some choosing different economic metrics for evaluation than what others might use.
When I'm looking for growth opportunities for my investment portfolio, I consider three primary factors: Businesses benefiting from long-term global macro trends, companies that have a stable competitive position in their industry, and valuations reasonable enough that they allow for appreciation.
These three growth stocks check all those boxes and have strong long-term outlooks.
1. Brooks Automation
Brooks Automation (AZTA -1.10%) offers an unorthodox combination of businesses that are each plays on different growth industries. The company's semiconductor solutions segment offers a number of products such as contamination control equipment and robotic handling systems that are used in semiconductor fabrication, storage, and transportation. With a global customer base, Brooks will benefit over the next decade from trends that are driving semiconductor demand, such as the Internet of Things, 5G expansion, robotics proliferation, and the normal replacement cycle for electronics in consumer, commercial, and industrial applications. Brooks doesn't exist in a world without competition, but you're usually in a good spot as a niche supplier to customers with strong growth catalysts.
Brooks also has a life sciences segment through which it provides genomic services and tissue sample management to pharmaceutical, diagnostics, education, and research clients. Brooks' products include storage equipment, sterilization tools, and items used for organization. The company also provides services related to the storage, transportation, preparation, and management of lab materials. Life sciences are expected to enjoy accelerating demand in both developed and emerging markets.
Brooks is delivering balanced revenue growth in both segments, and its sales have averaged nearly 20% annual expansion in recent years. The company has expanded organically and through selective acquisitions, but it has acquired new businesses without taking on much debt, meaning it is shrewdly funding additive purchases with internal cash flows. The stock's forward price-to-earnings (P/E) ratio is somewhat high at 45, but that's relatively modest compared to many larger tech and healthcare companies with comparable double-digit growth outlooks. Sustained growth will allow the stock to grow into its valuation ratios, so I'm not dissuaded by that P/E. Brooks is an opportunity for investors to buy the profitable supplier of the headline makers in growth industries at a reasonable multiple.
2. Keysight Technologies
Keysight Technologies (KEYS 1.72%) provides a wide range of testing and measurement products for manufacturers of communications, aerospace, electronics, semiconductor, energy, and automotive customers around the world. The company's offering allows customers to conduct R&D and bring new products to market more quickly and at a lower cost, and Keysight has gained especially strong traction among telecoms networks as they build out 5G infrastructure. Those industries are all growth categories, and this stock represents under-the-radar exposure to 5G catalysts for investors.
Keysight struggled with shutdowns related to COVID-19 in 2020, but it was able to return to year-over-year growth late in the year as manufacturing capacity came back online. Investors should expect Keysight to continue delivering its high sales growth rate, which has averaged nearly 10% annually, with even larger potential gains in profits due to scale. Investors can pick this stock up at a forward price-to-earnings ratio of only 26.4, which is cheap for anything with this growth potential. That's a ton of upside and room to run.
Proofpoint (PFPT) provides cybersecurity software enabling the secure management and storage of sensitive data for large and medium-sized businesses. Distributed workforces, remote client interactions, and evolving compliance will all drive demand for cloud security solutions for the foreseeable future. Importantly, Proofpoint collaborates with larger potential competitors with complementary solutions, such as CrowdStrike and Okta. This improves the capabilities of each security company, and it also delivers a better customer experience without creating incentives to step on each other's toes.
Compared to its peers, Proofpoint trades at a much more palatable price-to-sales ratio of 7.7 and forward P/E of 69. That might be high for value investors, but this is a high growth opportunity that actually looks cheap relative to alternatives. I'm comfortable paying up a bit today to gain that upside opportunity. As cloud computing becomes even more important for businesses and consumers, Proofpoint's services will be in demand. If the company can retain or improve market share, then it's going to be great for investors.