Historically, value stocks have outperformed growth stocks over the very long term (17% average annual return vs. 12.6% average annual return). Value stocks have also been the preferred investment vehicle to growth stocks during the early stages of an economic recovery.
But if you were to look at my portfolio transaction history over the past two months, you'd see a steady diet of growth stocks being purchased. With interest rates expected to remain at or near historic lows for years to come, access to cheap capital should propel growth stocks even higher.
With this in mind, here are the five growth stocks I've opened a position in or added to over the past two months.
To begin with, I added to my existing position in leading telehealth company Teladoc Health (TDOC -0.79%) after a more than 50% decline in the company's share price from mid-February. On a percentage basis, I increased my stake by almost 18%, which solidifies Teladoc as a top-10 holding of mine.
While there remain concerns that Teladoc's growth will slow once the U.S. officially puts the pandemic in the rearview mirror, I don't foresee much in the way of slower growth, thanks largely to the competitive advantages provided by telehealth services. Virtual visits are far more convenient for patients, and they allow physicians the ability to keep better tabs on their chronically ill patients. More frequent communication could lead to improved patient outcomes. That's a positive for the entire healthcare treatment chain, and it means less money out of the pockets of health-benefit providers.
Additionally, the acquisition of leading applied health signals company Livongo Health in the fourth quarter of 2020 provides a degree of differentiation that its competitors can't match. Livongo uses artificial intelligence to send tips and nudges to its chronically ill members to help them lead healthier lives. Livongo had already reached recurring profitability prior to be acquired by Teladoc, yet it's still in the very early innings of its expansion in helping patients with diabetes, hypertension, and weight management issues.
Very few companies have me excited about the future quite like Teladoc does.
In mid-April, I opened a position in volatile gaming company Skillz (SKLZ -3.17%). I'm currently up 28% on that position, but would willingly accept further downside over the short-term to beef up my stake.
Generally speaking, gaming is a highly competitive industry. Rather than go toe-to-toe with established gaming developers that have much deeper pockets, Skillz instead chose to take on the high-growth middleman role. It's built a platform that allows gaming enthusiasts to compete against each other for cash prizes. In turn, Skillz and the game developer in question get to keep a cut of the cash prize. Since it's a lot cheaper to maintain a platform model than it is to consistently develop hit games, Skillz is basking in a 95% gross margin.
While I'd be lying if I said I wasn't disappointed to see higher headcount, marketing, and reinvestment widening losses of late, I'm also extremely encouraged by the multiyear agreement signed with the National Football League (NFL) in early February. Football is the unquestioned most-popular sport in the U.S., and NFL-themed games could start hitting Skillz platform in less than a year.
Patience will be necessary with Skillz, but I see a future Esports disruptor in the making.
The Original BARK Company
Over the past two months, I've made two separate purchases of The Original BARK Company (BARK), which focuses on dog products and services. These purchases added to my existing position in the company, which folks probably know better as BarkBox, and increased my stake by approximately 35%. Like Teladoc, BARK finds itself as a top-10 holding in my portfolio.
One reason I'm really excited about this company is the unstoppable force known as pet owners. Nearly $110 billion is expected to be spent on companion animals this year, and it's been well over a quarter of a century since year-over-year spending on pets declined in the United States. Pet owners will spend big to keep their pets happy and healthy, which is why it's no surprise that BarkBox's subscription base grew 91% to 1.2 million over the past year.
BarkBox's margins are also eye-popping. Even though you can find its products in some 23,000 retail outlets around the country, BARK is predominantly an online/subscription-based service. This means relatively low overhead costs and a gross margin that's sticking right around 60%.
BARK looks to be highly recession-resistant, and its innovation should allow the company to make a run at doubling its sales over the next two years.
Following the cratering of its shares after releasing its first-quarter operating results (first week of May), I opened a position in edge cloud platform provider Fastly (FSLY 3.10%). Similar to Skillz, I'm up 28% from my initial buy-in, but would welcome short-term weakness to build on my stake.
Fastly is best known for its role as a content delivery network (CDN). It's tasked with expediting the delivery of content to end users in a secure manner. We were already witnessing an uptick in online content consumption prior to the pandemic, but this trend was kicked into overdrive when workplaces were disrupted and people stayed in their homes. Even when things return to some semblance of normal, demand for CDN and security solutions isn't going away. That's great news for an operating model that's usage-based.
The other thing to really like about Fastly is the growth it's generating from existing clients. The company's dollar-based net retention rate over the past three quarters is 147% (Q3 2020), 143% (Q4 2020), and 139% (Q1 2021), respectively. This tells us that Fastly's existing customers spent 47%, 43%, and 39%, respectively, more than they did in the prior-year periods. These figures suggest growth isn't slowing nearly as much as the recent share price weakness would imply.
If we continue to see a steady shift toward online content consumption, Fastly could reasonably triple its full-year revenue by 2024.
Finally, the newest addition to my portfolio is specialty biotech stock Vertex Pharmaceuticals (VRTX -0.58%). Added last week, I would welcome any near-term weakness in Vertex to further boost my stake.
What makes Vertex so special is the company's incredible success in treating cystic fibrosis (CF). CF is a genetic disease characterized by thick mucus production that can obstruct a patients' lungs and pancreas. Though it has no cure, Vertex has developed multiple generations of gene-specific treatments. The latest, combination therapy Trikafta, was approved almost five months ahead of its scheduled review date with the Food and Drug Administration. In its first full year on pharmacy shelves, Trikafta brought in close to $3.9 billion in sales. At its peak, it'll likely top $6 billion in annual revenue.
Aside from the safety of its CF revenue stream, Vertex is rolling in the dough. It ended March with $6.9 billion in cash and cash equivalents. This capital is more than enough to fund its nearly one-dozen internally developed compounds, and it'll likely allow Vertex to go shopping, with the purpose of expanding its revenue stream beyond CF.
Vertex is that rare blend of growth and value stock in the biotech space, which is why I confidently added it to my portfolio.