It's been a tough year for investors as rising interest rates torpedoed higher-growth stocks. It's also been a challenging year for big blue chip stocks as the S&P 500 retreated about 10% this year.
But if we pull the chart back further, we'll notice that the S&P 500 has still risen nearly 50% over the past three years. Therefore, the current pullback might simply be setting the market up for its next bull run. Therefore, let's look at three promising stocks -- Cloudflare (NET -3.01%), Ferrari (RACE -0.96%), and The TJX Companies (TJX 0.76%) -- that could all head much higher over the next three years.
Image source: Getty Images.
1. Cloudflare: The cybersecurity play
Cloudflare's cloud-based content delivery network (CDN) accelerates the delivery of digital content for websites and apps. It also shields websites from bot-driven DDoS (distributed denial of service) attacks by separating human visitors from malicious bots.
Cloudflare serves data from 275 cities across more than 100 countries. It serves an average of 36 million HTTP requests each second, and it often refers to itself as a "water filtration" system for internet.
Cloudflare has grown like a weed since its initial public offering in late 2019. Its revenue rose 49% in 2019, 50% in 2020, and 52% to $656.4 million in 2021. It expects its revenue to grow 47% to 48% in 2022, even as the macro headwinds stretch out its sales cycles and delay some payments.
Cloudflare isn't profitable by GAAP (generally accepted accounting principles) or non-GAAP measures yet, but its non-GAAP losses are narrowing, and its free-cash-flow margins are improving.
Its stock isn't cheap at 26 times this year's sales. However, it could still easily grow its revenue by 30% to 50% for the foreseeable future -- which suggests it could grow into that premium valuation.
2. Ferrari: The defensive luxury play
As one of the top luxury supercar makers in the world, Ferrari is well insulated from inflation and a potential recession because its affluent customers are largely resistant to economic downturns. Its brand appeal also gives it the ability to comfortably offset any higher costs with price hikes.
Ferrari ships only a few thousand vehicles each year, so its supply chain is smaller and easier to manage than that of larger automakers. That focus reduces its exposure to the ongoing supply chain headwinds.
Between 2016 and 2021, Ferrari's annual shipments rose from 8,014 to 11,155 while its revenue grew at a compound annual rate of 7% from 3.1 billion euros to 4.3 billion euros ($4.4 billion). Its margin based on adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) expanded from 28.3% to 35.9%, and its adjusted earnings per share (EPS) more than doubled. For 2022, it expects its revenue to rise 15% to $5 billion and for its adjusted EPS to increase 7% to 9%.
Ferrari's stock isn't cheap at 43 times forward earnings, but its shipments will likely continue to climb over the next few years -- regardless of how rising interest rates, inflation, volatile gas prices, and supply chain headwinds affect the broader auto industry.
3. The TJX Companies: The off-price retail play
TJX owns the off-price retailers TJ Maxx, Marshalls, HomeGoods, Homesense, and Sierra Trading Post. Its core strategy is simple: It buys liquidated inventories from other retailers at rock-bottom prices, then sells them back to customers at 20% to 60% lower prices than full-price retailers.
To accomplish that, TJX leverages a team of over 1,200 associates to source products from approximately 21,000 vendors across 100 countries. It then rotates those products quickly to encourage shoppers to regularly visit its stores. That shrewd approach enabled TJX to profit from the "retail apocalypse" and expand its brick-and-mortar footprint as other retailers retreated.
Between fiscal 2017 and 2022 (which ended in January), TJX's annual revenue rose at a compound annual rate of 8%, but its adjusted EPS declined as it racked up higher expenses throughout the pandemic. In fiscal 2023, however, analysts expect its revenue and adjusted EPS to grow 6% and 11%, respectively.
TJX's stock is reasonably valued at 22 times next year's earnings, and its reputation as an evergreen, recession-resistant investment could help it easily outperform the market over the next three years.
