While the market was in nearly nonstop rally mode for most of the past six years, investors didn't need to look far to uncover an abundance of growth stocks. But not all growth stocks are created equal. While some look poised to deliver extraordinary gains going forward, the recent market turbulence has crushed some that were overvalued, burdening their shareholders with hefty losses.
What exactly is a growth stock? I'll define it as any company forecast to grow profits by an average of 10% or more annually during the next five years -- although that's an arbitrary number. To gauge what's "cheap," I'll use the PEG ratio, which compares a company's price-to-earnings ratio to its forecast future growth rate. A PEG of around 1 or less could signal a cheap stock.
Here are three companies that fit that bill.
We'll begin this week by looking at the housing industry and examining the one builder that stands out head and shoulders above the rest in terms of long-term performance: NVR (NYSE:NVR).
NVR may not be a household name (pun fully intended), but it's one of America's largest homebuilders. It operates under the Ryan Homes, NVHomes, Fox Ridge Homes, and Heartland Homes trade names, and it predominantly focuses on midscale-to-upscale homes in states located on the East Coast.
What makes NVR so special is the strategy that helped it survive the housing bubble with but a slap on the wrist while its peers, in some instances, struggled to survive. As Fortune noted last year, NVR's strategy to option its land, rather than purchase, was key to keeping its debt levels from ballooning during the contracting market. In addition, NVR tends to operate in markets where it's the leading builder, or among the top, in terms of market share. Having a high percentage of new build market share gives it operating leverage that coerces developers to accept its option land strategy, thus allowing it to avoid being buried under debt.
NVR also benefits by the type of customer it's targeting with its homes. For instance, in the first quarter, NVR noted that the average selling price for its homes was $375,700. We're not talking about an average selling price that's on par with its upscale peers, but we are talking about an average sales price that's high enough to attract a middle- or upper-income clientele. These buyers tend to be less affected by fluctuations in the economy, meaning a slowdown in U.S. GDP growth, or talk of a quarter-point rate increase by the Federal Reserve, isn't going to derail its growth strategy. And of course, it certainly hasn't hurt NVR's mortgage banking business or housing business that lending rates have been near historic lows for seven-plus years.
NVR's four-digit share price might make its stock appear expensive, but with shares currently valued at just 13 times forward earnings, and trading at a PEG of 0.9, the fundamental metrics would suggest NVR could still push higher.
Next, we'll take a brief look at why global hospitality giant Wyndham Worldwide (NYSE:WYN) could be the perfect blend of growth and attractive value for your portfolio.
Wyndham, which manages a bevy of popular hotel chains, including Howard Johnson, Days Inn, Travelodge, Ramada, and Microtel -- which Americans showed the highest loyalty to in the economy hotel category in a recent study conducted by Brand Keys -- is actually much more than a hotelier. Only around a quarter of Wyndham's revenue is generated from its hotel franchisees. Instead, the bulk of Wyndham's revenue derives from development and acquisition of timeshare resorts, as well as its timeshare exchange business.
The timeshare business, as you can imagine, can be quite cyclical and dependent on economic growth. Thankfully for Wyndham, and the industry as a whole, the U.S. and global economy spends far more time expanding than contracting. Furthermore, timeshares tend to go after middle-, upper-middle-, and even upper-income consumers who may be less likely to be affected by a downturn in the U.S. or global economy. The latest data from the American Resort Development Association showed that weighted average volume (a measure of spending) per timeshare guest actually rose 1.1% in Q4 2015 from the prior-year period. It would appear the timeshare market is healthy, and Wyndham probably has modest global growth and low yields in many developed countries to thank for that.
Acquisitions have been another key component to Wyndham Worldwide's growth. Managing to deliver between $700 million and $800 million in free cash flow annually, Wyndham often apportions its cash in three ways: dividends, share buybacks, and acquisitions. Since the company's business segments are all cash flow positive, it relies on operating cash flow to fuel its bolt-on acquisitions in domestic and international markets. Wyndham has a keen eye on boosting room growth in both its economy and midscale hotel lines, which could lend to sustained long-term growth if it continues to emphasize loyalty through its rewards program, and listens to suggestions from its guests.
Sporting a PEG of roughly 1, it's far too early to close the curtains on Wyndham.
To end the week, I thought we'd show a little love to small-cap growth investors looking for a solid deal by briefly looking at Sucampo Pharmaceuticals (NASDAQ:SCMP) in the biotech industry.
As you might imagine, the downside of investing in small-cap biotech stocks is that most are losing money. That isn't the case with Sucampo, which is projecting an adjusted profit of between $0.97 and $1.07 per share in fiscal 2016. Wall Street believes Sucampo's full-year EPS could double between 2016 and 2020.
The big concern with a company like Sucampo is that it's wholly reliant on a single drug, albeit across multiple indications. Amitiza, a drug designed to treat a bevy of chronic constipation problems, was first approved in 2008, and it's garnered a handful of label expansions throughout the years. Royalty revenue from licensing partner Takeda Pharmaceuticals totaled $16.5 million in Q1 2016, up about 5% from the prior-year period, with total sales of the drug growing to $91.7 million, as reported by Takeda. Chronic constipation is a very competitive indication, and Amitiza's growth has certainly been slower than analysts would have pegged years prior.
However, Sucampo has two tricks up its sleeve. First, its pipeline is looking to further expand Amitiza into two new pediatric indications, 6- to 17-year-olds, and those who are 6 months to 6 years old. This may not represent as large a market as with adults, but it also provides Amitiza with an opportunity to further expand its patient pool.
More important, Sucampo acquired Japan's R-Tech Ueno for about $275 million late last year to get a bigger piece of the global Amitiza revenue pie. This was reflected in the $9.2 million in additional revenue Sucampo recognized in Q1 from Amitiza that came on top of the $16.5 million it earned from Takeda. Direct sales to Mylan also rose 31% to $14.5 million during Q1.
With Sucampo working hard to keep its costs down, its forward P/E of 8 and PEG of 0.5 make this long-term growth stock look like an absolute bargain.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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