Investors are always looking for stocks with unusually strong growth prospects. The hard part is identifying these wealth-creating opportunities before they become obvious to everyone on Wall Street. Unfortunately, there's no surefire way to know in advance which stocks will soar.
Investors can boost their odds of finding these winners. Some do it by focusing on key factors involving the stock's business operations, like outsize market opportunities and industry-leading profitability.
Here are three such standouts that poised to generate excellent returns for patient shareholders from here.
1. Palo Alto Networks
The returns for Palo Alto Networks' (PANW 0.91%) stock in 2023 have already been impressive, but there is more room for this cybersecurity specialist to run. Sales growth last quarter beat expectations, for example, as revenue jumped 26% to $6.1 billion. These gains occurred despite slower IT spending, adding weight to the bullish thesis for this stock.
Palo Alto Networks benefits from businesses prioritizing cybersecurity spending today and from its leadership in next-gen security platforms. "Our strategy is resonating with a growing number of our customers," CEO Nikesh Arora told investors in mid-August.
Risks to buying the stock include potentially overpaying for this high-performing business given that shares are priced at over 12 times annual revenue. Yet Palo Alto Networks has earned a premium by posting steadily improving profitability and market share in a competitive tech industry.
2. Home Depot
Home Depot (HD 0.94%) has not participated in the 2023 rally, with share prices up just 4% this year. But that underperformance is about the weak short-term outlook rather than the excellent long-term prospects for the business.
Sure, revenue is being pinched today by slowing consumer spending and weaker demand among professional contractors for expensive home improvement projects. Comparable-store sales were down 2% in the most recent quarter and are likely to fall by about the same amount for the full 2023 year, according to management.
Home Depot is still fantastically profitable and cash-rich. Operating profit margin is on track to land at 14% of sales this year despite pressures from slowing growth and lumber price deflation. The chain enjoys one of the highest rates of return on invested capital, too, at nearly 40%. And shareholder returns will be further supported by a growing dividend that currently yields 2.6%.
Fundamental industry metrics like home prices and the average age of housing stock all point to significant growth ahead in the home improvement industry. Home Depot has made a habit of capturing more than its fair share of this expansion through the years, and it will likely do so again when the next cyclical upturn arrives.
3. Garmin
Garmin (GRMN 0.29%) isn't your average tech hardware manufacturer. The company sells a wide range of products that include wearable fitness devices along with complex aircraft and boat navigation platforms. This diversity helps Garmin grow overall sales, as it did last quarter, even when a few of its niches are under demand pressure.
Garmin is a skilled innovator, too. A steady flow of new products allowed it to maintain stellar profitability of more than 20% of sales through a challenging selling environment in 2023. Cash flow trends are similarly strong, and it is sitting on roughly $3 billion of cash that management can use to target faster growth.
As with the other stocks on this list, there's no guarantee that Garmin will beat the market over the next 5 to 10 years. But its brand power, scale, and financial strength combine to give it an excellent shot at producing great returns for shareholders over the long term.
