After a strong couple of trading days in January, market volatility is back and fiercer than ever. Big earnings beats from Apple, Microsoft, and Alphabet paired with step sell-offs in Meta Platforms stock and Netflix stock pave the way for a wild ride in 2022.
The term "growth stock" may conjure images of a red-hot unprofitable tech stock with potential. And while Matterport (MTTR 0.85%) certainly fits that bill, United Parcel Service (UPS 0.14%) and Freeport-McMoRan (FCX 2.23%) are industry-leading businesses that offer a less risky way to invest in growth. Here's what makes all three growth stocks great buys now.
Image source: Getty Images.
Take note of the matter at hand
Scott Levine (Matterport): With the recent sell-off in growth stocks, forward-looking investors -- with a strong stomach for volatility -- have a wide variety of options to consider. One growth name that's showing up on my radar is Matterport, a company that digitizes physical spaces to create what it calls "digital twins." I started a position in Matterport last month, and the recent pullback has me seriously considering whether I should add to my position. Since the start of 2022, shares of Matterport have plunged 54%, but, like T-Swizzle, I'm happy to shake it off.
Savvy investors know that growth tickers oftentimes exhibit more volatility than conservative stocks. With Matterport's recent slide, this seems to be the case. There hasn't been any company news that is shaking my resolve; in fact, the stock drew attention this week from Deutsche Bank, where analyst Bhavin Shah started coverage on the stock with a buy rating and $14 price target, representing an upside of about 44% from the stock's current level.
For many people interested in metaverse-related investments, Matterport has emerged as a widely discussed name. And while I think that it's a logical consideration, my interest in the company transcends the metaverse; Matterport is already achieving success in the real world, serving customers in a variety of industries such as real estate, retail, and hospitality, just to name a few. The company reported during its third-quarter 2021 earnings presentation that its subscription revenue grew 36% year over year to $15.7 million; meanwhile, its subscription gross margin expanded from 74% in Q3 2020 to 77% in the recently completed quarter. It appears, however, that Matterport has a considerable opportunity to grow. Management pegs the company's total addressable market at more than $240 billion.
A different kind of growth stock
Daniel Foelber (United Parcel Service): Since when did the world's largest package delivery company become a growth stock? Since it began growing its business at an impressive rate and generating more net income and free cash flow (FCF) than ever before. The chart below says it all.
UPS Revenue (Annual) data by YCharts
Over the last five years, UPS has grown revenue by 35%, net income by 169%, and FCF by 68%. In June, the company said it plans to pass along 50% of its adjusted earnings per share (EPS) to its shareholders through the dividend. Earning $12.13 in adjusted 2021 EPS, UPS fulfilled its promise by increasing its quarterly dividend to $1.52 per share -- or $6.08 per share per year for 2022. UPS now has a dividend yield of 2.7%, making it an attractive blue chip dividend stock.
UPS is positioned to thrive in both the short term and the long term. In the short term, its pricing power allows it to combat inflation. During its Q3 2021 earnings call, UPS announced a 5.9% general U.S. rate increase for 2022. So far, UPS is proving it can pass along higher costs to customers without impacting demand.
Another short-term advantage is UPS's strong FCF. UPS earned $15 billion in 2021 operating cash flow, which was plenty to cover $4.2 billion in capital expenditures and $3.4 billion in dividend payments. For 2022, UPS expects to pay $5.2 billion in dividends and spend at least $1 billion on share buybacks, which should be easily covered by the $9 billion it expects to earn in FCF.
Over the long term, UPS's increasingly sophisticated domestic and international network is positioned to serve the growing demand for package deliveries. The company's "better, not bigger" framework is focused on higher-quality revenue, not just growing sales for the sake of it. So far, this strategy has been extremely effective, as UPS has been able to grow its earnings and FCF at a much higher rate than revenue -- a sign that it is converting more sales into actual profit. With a price-to-earnings ratio of 19.1 and a dividend yield of 2.7%, UPS is the ideal growth stock for risk-averse investors looking for a quality business at an attractive price.
Freeport-McMoRan and the case for copper
Lee Samaha (Freeport-McMoRan): It might seem strange to recommend a copper mining stock as a long-term growth candidate, but hear me out. The case for buying the stock rests on the idea that long-term demand will receive a boost due to the usual factor of economic growth combined with copper's role in helping to decarbonize the economy. In addition, in a world where it's getting increasingly challenging to get mining permits, Freeport-McMoRan has a relatively less risky portfolio of mining assets.
Copper's importance to decarbonization comes from its use in electric vehicles (EVs) and renewable energy. EVs and renewable energy technologies use four to five times more copper than internal combustion engines and fossil fuel power generation, according to the company. Whether it's wiring, storage, or transmission and distribution, the economy is going to need more copper to go green. On top of that, the trend toward electrification and connectivity continues.
On the other side of the equation, industry supply and scarcity are becoming an issue with political uncertainty in Chile and Peru (together accounting for 40% of global production) and increasingly negative global attitudes toward granting permits. Within all of this, Freeport-MoRan stands with large existing mines in the U.S. and Indonesia, and with plans already in place to ramp up production and sales by 13% in 2022, and a further 5% in 2023.
If the long-term bull case for copper is correct and the price drifts higher, then Freeport-McMoRan will be a big winner. Demand is growing and so is Freeport-McMoRan's production.