The stock market has been warming up lately, but there's still a long way to go for many stocks that remain well below their former highs. You can't know when the next bull market will officially begin, but now could be a great time to set up your portfolio for when it does.
Now that the downturn has exposed some stocks that may have lacked the fundamentals to justify their lofty valuations, you can focus on the blue-chip growth stocks that got tossed out with the kitchen sink. Here are three growth stocks the could provide solid returns over the next five years.
A streaming winner for the long-term
The Walt Disney Company (DIS -0.45%) doesn't scream growth stock at first glance, but some good things are bubbling under the surface at the House of Mouse. The company has leaned on its iconic intellectual property, including brands like Pixar, Marvel, and countless classics, to build a streaming business that has exploded in growth since launching in 2019.
Disney owns and operates Disney+, ESPN+, and two-thirds of Hulu, offering live channels and catalogued content. In total, Disney is sitting on a massive subscriber base; the segments have the following paid subscription counts as of October 1, 2022:
- Disney+: 164.2 million
- ESPN+: 24.3 million
- Hulu: 47.2 million
That massive audience will likely drive growth over the next several years. Management has been focusing on growing subscriptions over making money, but that will soon change. Analysts are looking for earnings-per-share (EPS) growth averaging 12% annually over the next three to five years, which should help carry the stock higher. Shares are currently down more than 40% from their peak, and trade at a forward price-to-earnings ratio (P/E) of 26, below their average of 36 over the past decade.
An emerging luxury brand
Home furnishings brand RH (RH 0.64%) might be one of the most exciting turnaround stories on Wall Street. The company was once a floundering brand called Restoration Hardware, but rebranded itself as RH over a decade ago as an upscale brand. The company has grown leaps and bounds ever since, doing $3.7 billion in sales over the past four quarters.
But the business has hit a snag. The housing market has cooled off recently because higher mortgage rates and high home prices have cooled demand for homes and their furnishings. RH reported a year-over-year revenue decline in the third quarter of 2022, coming in at $869 million versus just over $1 billion the prior year.
Management has avoided discounting and promotions to preserve the brand's pricing power. It acknowledged that this might hurt short-term sales, but believes it will support profitability when demand returns. Analysts believe the company's future is bright, calling for 10% annual EPS growth over the next three to five years.
The stock is trading at a P/E ratio of under 12; RH's growth outlook is similar to the market's historical growth rate; yet, the S&P 500 currently trades at nearly double the P/E ratio. Investors could see RH appreciate and close that gap as housing rebounds over time.
Grab a slice of this winner
Pizza chain Domino's Pizza (DPZ -0.08%) has steadily grown into one of the largest restaurant chains in the world. The company has more than 19,500 stores worldwide, translating to approximately 20% share of the global quick-service pizza restaurant market. The company has done more than $4.4 billion in revenue over the past four quarters, and its widespread locations, low prices, and easy-to-use smartphone app have helped grow the business over the years.
One could argue that pizza is a commodity -- it's easy to make, as evidenced by the smattering of local pizzerias across virtually every town in America. There are more than 75,000 pizzerias in the United States alone. However, that seemingly works in Domino's favor; the company can leverage its size to produce a satisfactory product at a lower price than local competitors. Domino's competes with other chains, but the highly fragmented nature of the pizza industry could mean more room for Domino's to gobble up market share.
Domino's returns its profits to shareholders through dividends and share repurchases, spending $510 million over the past year on retiring shares. Analysts believe Domino's can grow EPS by an average of 12.5% annually over the next three to five years, so the company's outlook seems bright.
The stock has declined more than 35% from its high and trades at a P/E ratio of 28. That's not a bargain compared to the broader market, but it's below the stock's decade average of 33 -- evidence that Wall Street holds Domino's Pizza in high regard.
