The growth stock meltdown over the past year has taught investors a tough lesson. There's a huge difference between companies that can grow their business and those that can expand profits. At some point, the market stops rewarding growth at all costs. That makes companies that can increase shareholder value stand out.
Three companies with excellent track records of delivering above-average earnings growth are Domino's Pizza (DPZ 2.10%), Palo Alto Networks (PANW 4.19%), and Prologis (PLD 0.72%). Like most growth stocks, their share prices have taken a beating during the sell-off. However, given their knack for value-enhancing growth, they're great stocks to buy with conviction these days.
A top growth stock hiding in plain sight
Domino's Pizza doesn't get the credit it deserves. The pizza purveyor has grown its adjusted earnings per share at a more than 20% compound annual rate over the past decade. That has helped drive superior total returns:
DPZ Total Return Level data by YCharts
That massive outperformance comes even though shares of Domino's have plunged more than 37% since the start of last year. While the company is facing some inflationary headwinds, it expects to continue growing at a tasty pace for the next several years. Even though the company is already the world's largest pizza company, it plans to expand its global footprint by 6% to 8% over the next few years. Add in same-store sales growth, and global sales should rise by 6% to 10%. Given the company's operating leverage, analysts expect earnings to grow at a much faster pace; forecasting mid-teens earnings-per-share growth over the next two years.
With shares trading at a reasonable valuation following its recent plunge, Domino's growing earnings should deliver delightful total returns from here.
Cashing in on cybersecurity
Cybersecurity leader Palo Alto Networks' revenue growth rate has accelerated in recent years, driven by the company's investments in next-generation security solutions. Those investments are starting to pay off by driving earnings and cash flow growth. The company returned to GAAP profitability after a four-year hiatus last year and expects earnings to grow sharply in the future.
The company is also generating growing free cash flow. It converted a third of its revenue into free cash last year and expected that margin to expand to 34.5%-35.5% this year. That's giving it the money to buy back its beaten-down stock (shares have fallen 25% from their peak early last year) and make investments to enhance its platform and growth prospects while maintaining a strong balance sheet. It ended its fiscal first quarter with $3.8 billion of cash, equivalents, and short-term investments against $3.7 billion of debt in the form of convertible senior notes.
Palo Alto Network's growing cash flow and cash-rich balance sheet give it the flexibility to capitalize on acquisition opportunities. The company recently bought Cider Security to bolster its Prisma Cloud platform. With tech valuations falling sharply from the peak, the company could make more deals to purchase earlier-stage companies that still need outside capital to grow.
Built-in growth
Logistics real estate giant Prologis is coming off a strong year. The industrial REIT's core funds from operations (FFO) grew by 12.7% per share after excluding its share of the profits from the real estate investment funds it manages (and by 24.3% when adding in that income). Despite the robust earnings growth, shares have tumbled nearly 25% from their peak.
Prologis expects to continue growing at a healthy pace in 2023 and beyond. The REIT predicts its core FFO will increase by about 9.5% per share at the mid-point of its guidance range. Meanwhile, it foresees the net operating income of its existing portfolio growing by 8% to 10% per year over the next several years as existing leases expire and it captures much higher market rents. In addition, it sees its value-enhancing development strategy and acquisitions as further enhancing its growth. These factors set the company up to continue delivering sector-leading core FFO and dividend growth.
Top-notch growth stocks
It's easy for companies to grow their customer bases. What separates the wheat from the chaff among growth stocks are companies that can expand their earnings and cash flow. They can continue to grow during downturns and grab market share from money-losing rivals.
That makes Domino's, Palo Alto Networks, and Prologis stand out from the pack. They've proved their ability to grow shareholder value, and they have ample value-enhancing growth ahead. They're great growth stocks to buy without hesitation these days.
