With the stock market in nearly nonstop rally mode over the past six years, investors haven't needed to look far to uncover an abundance of growth stocks. But not all growth stocks are created equal: While some could still deliver extraordinary gains, others appear considerably overvalued, and might instead burden investors with hefty losses.
What exactly is a growth stock? Though it's arbitrary, I'll define a growth stock as any company forecast to grow profits by 10% or more annually during the next five years. To decide what's "cheap," I'll use the PEG ratio, which compares a company's price-to-earnings ratio to its future growth rate. Any figure around or below one could signal a cheap stock.
Here are three companies that fit the bill.
Goodyear Tire & Rubber (NASDAQ:GT)
We'll begin this week by looking at a company that literally puts the rubber to the road: Goodyear Tire & Rubber.
The Great Recession was very unkind to Goodyear. New car sales fell off a cliff, and commodity prices exiting the recession soared, thus boosting its input costs and putting the company in the unfavorable position of trying to raise prices on its tires at a time when the U.S. economy was reeling. But times have changed in a big way, and Goodyear is now in the driver's seat as an attractive growth stock.
First off, Goodyear is benefiting from a substantial drop in commodities, which in turn is pushing rubber prices noticeably lower. A glut of rubber supply, compounded with slower growth out of China -- which has dampened demand for a number of commodities beyond just rubber -- have pressured the commodity. Rubber prices on the Singapore Commodity Exchange tumbled from 72.72 cents per pound to begin the year to 55.44 cents per pound by November 2015. You'd think that'd be bad news for most companies, but it's great for Goodyear because it means its input costs are tumbling. Lower costs are providing a hefty boost to its bottom line.
On the flipside, the automotive industry is also providing quite the lift for Goodyear. Based on estimates from IHS Automotive, sales of cars and light trucks are expected to peak at 18.2 million in 2017, which would easily surpass the previous record of 17.35 million vehicles sold in 2000. Lower lending rates, inexpensive fuel costs, and a low unemployment rate are coercing consumers to take the plunge and buy new vehicles. A company like Goodyear is benefiting not only from the rise in new car sales, but also from the improved longevity of vehicles already on the road.
Sporting a sub-one PEG ratio and a forward P/E of less than 10, Goodyear Tire and Rubber could wind up putting the pedal to the metal in your portfolio.
Marriott International (NASDAQ:MAR)
We rarely think of traditional hotels as growth stocks, but Marriott's strong brand name, construction, and acquisition strategy make it the epitome of a growth stock within its industry.
Without question the most transformative news from the company was announced in November: a $12.2 billion acquisition of Starwood Hotels & Resorts (NYSE:HOT), the parent company behind such brands as the Westin and Sheraton, creating the largest hotel company in the world. A bigger company can reach a greater number of clients, offering them a variable number of price points and more locations with which to potentially redeem rewards. The concept of "bigger is better" doesn't work in every industry, but within the hotel industry it often makes a lot of sense.
Even more than just reaching more consumers, the combination creates the most robust new room pipeline in the industry. In just the third quarter alone, Marriott announced the addition of more than 10,000 new rooms, and it ended Q3 with plans to add more than 260,000 additional rooms worldwide. Mind you, this report was released prior to its proposed buyout of Starwood. Starwood opened approximately 4,800 rooms of its own during Q3, and signed contracts for another roughly 8,600 rooms. This is a company that can use its size to grow very rapidly.
Finally, don't discount the role a stabilizing global economy could play on pricing. Marriott and Starwood focus on more affluent clientele normally, and it's these individuals who tend to be less affected by global economic fluctuations. This gives Marriott more predictable cash flow than many of its peers, and it also allots the hotel giant better pricing power.
Currently sitting on a PEG ratio just below one, and expected to grow its EPS from a reported $2.61 in 2014 to an estimated $4.47 by 2017, Marriott could help growth stock seekers sleep better at night.
Last but not least, we have entertainment and software solutions company GoPro, which is perhaps best known for its sporty, but durable, cameras that can record consumers doing just about any sporting activity you can imagine.
Compared to the aforementioned two companies, GoPro has had a miserable year. Shares of the digital giant are down a whopping 71% year-to-date through Dec. 27, with both Wall Street and investors blaming the dip on sluggish sales for its next-generation HERO4 Session devices, which were believed to be priced too high initially for rapid uptake, but have subsequently been relaunched at a more attractive price point. The good news is that GoPro appears to be taking smart steps to position itself for long-term success.
For the time being GoPro is being viewed predominantly as a photographic solutions company, and that's just fine by me. As noted in its third quarter press release, GoPro products accounted for five of the top 10 products on a unit basis in the combined camcorder and digital camera category in Q3. These are durable, well known cameras, and they've generally received good reviews, which should go a long way toward boosting sales and keeping existing customers loyal.
But the real allure of GoPro is what it might do beyond the lens. It currently owns one of the most popular channels on YouTube, which lends to what it might be able to do with securing ad revenue in the future. GoPro is also tapping into the earning potential of its customers by allowing them to submit photos, video, and edited videos that may be eligible for rewards, as described by my Foolish colleague Tamara Walsh. Not only does this keep customers loyal to the brand, but it opens new channels of revenue beyond just camera sales, such as through streaming content.
With GoPro looking at an estimated profit nearing $2 per share by 2018 or 2019, and the company expected to nearly double its revenue between 2014 and 2018, I'd suggest this is a cheap growth stock that more risk-tolerant investors may want to consider.