Except for energy stocks, 2022 has been a very difficult year to find any equities able to perform well in these volatile markets. And high-growth stocks have been hit especially hard.
Consider this: The iShares Russell 1000 Growth ETF (IWF), which tracks the performance of the Russell 1000 Growth Index, is down 23% year-to-date, compared to a 14% decline for the S&P 500 and a 6% dip for its counterpart, the iShares Russell 1000 Value ETF (IWD).
However, if you are looking to invest over a longer period – say, anything more than three years – high-growth stocks are a great place to put a portion of your overall investment portfolio.
The iShares ETF of growth stocks mentioned earlier has delivered positive returns in nine out of the past 10 years; the only exception was a 1.7% decline in 2018. Yes, past performance doesn’t guarantee future returns, but high-growth stocks remain an excellent strategy for improving a portfolio’s overall performance over time.
Today, we’re going to look at 10 of the best high-growth stocks to buy. We have selected 10 picks from the S&P Composite 1500 Index – made up of the S&P 500, S&P MidCap 400 and S&P SmallCap 600 – that meet a number of criteria. They must have produced at least 20% average compound annual growth in revenues over the past five years, analysts must expect an average of 20% growth in both revenues and earnings over the next two years, and each of them must enjoy at least a consensus Buy (if not Strong Buy) rating from Wall Street’s analyst community.
It’s a small and exclusive club. Let’s take a look.
Data is as of June 1. Analyst ratings courtesy of S&P Global Market Intelligence. Stocks listed in reverse order of analysts’ consensus ratings, where the lower the score, the better the consensus ranking.
- Market value: $4.2 billion
- Analysts’ ratings: 5 Strong Buy, 2 Buy, 4 Hold, 0 Sell, 0 Strong Sell
- Analysts’ consensus recommendation: 1.91 (Buy)
The main product from Tandem Diabetes Care (TNDM, $65.67) is pushing the innovation envelope to help its customers cope with their diabetes. Its main product is the t:slim X2 insulin pump, which can hold up to 300 units of insulin but is 38% smaller than some of the competition.
As of early May, the company boasted more than 350,000 customers worldwide. For the most part, those customers have type 1 diabetes, vary in age, are a mix of men and women, and use continuous glucose monitoring (CGM).
Since 2012, this healthcare stock has grown from negligible revenues to projected sales of at least $850 million in 2022. Tandem plans to grow its global installed base of customers from its current level to 1 million people (though it admittedly doesn’t provide a timeline). But that growth will start here in the U.S., where 1.8 million people suffer from type 1 diabetes. Of these, only 36% use an insulin pump; the rest are on multiple daily insulin (MDI) therapy.
However, the opportunity outside the U.S. is even greater; just 12% of people with type 1 diabetes in the countries Tandem serves opt for a pump. And none of this takes into account the worldwide opportunity to serve people with type 2 diabetes. TNDM estimates there are 9 million people worldwide with type 2 who require intensive insulin therapy, and just 5% use a pump.
Tandem has been an extremely high-growth stock over the past half-decade, with a revenue compound annual growth rate (CAGR) of 52.8% over that time, according to S&P Global Market Intelligence. That’s projected to drop to 20.9% over the next two years, according to analyst estimates, but that could be a conservative outlook given how many opportunities are available to Tandem.
The company recently estimated that it would grow sales in 2022 by 22% year-over-year (YoY) at the midpoint of its guidance, which is up from its previous outlook. Meanwhile, it expects adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) margin to be 14.5% at the midpoint. Assuming Tandem meets its guidance, TNDM is trading at just 5 times its projected 2022 sales.
While TNDM shares did sell off following the report, Raymond James analyst Jayson Bedford believes that’s an overly harsh reaction.
“While some investors may be critical of the 2022 guidance (slightly less than the 1Q beat), we believe this view is short-sighted,” says Bedford, who rates the stock at Outperform (equivalent of Buy). “First, at this level, there is no reason for management to be a hero, and second, we believe the guide still leaves ample room for potential upside, which supports multiple expansion.”
- Market value: $15.1 billion
- Analysts’ ratings: 12 Strong Buy, 7 Buy, 5 Hold, 1 Sell, 0 Strong Sell
- Analysts’ consensus recommendation: 1.80 (Buy)
SolarEdge Technologies (SEDG, $272.48) manufactures and sells direct current (DC) optimized inverter systems to residential and commercial solar installations. Since SolarEdge commercialized the system in 2010, it has shipped over 31.6 gigawatts (GW) of these systems to customers in more than 133 countries.
On May 2, SolarEdge reported record first-quarter 2022 revenue of $655.1 million, up 19% from Q4 2021 and 62% higher than the year-ago period. Non-GAAP (generally accepted accounting principles) net income was $68.8 million up 10% sequentially and 24% YoY. Both figures topped analyst estimates.
BMO Capital Markets analyst Ameet Thakkar notes that cost challenges persist, evidenced by the company’s adjusted gross margin guide of 26% to 29% for the second quarter of 2022. However, he maintains an Outperform rating on the stock, saying the “ramp-up of Mexico manufacturing line, falling shipping prices pointing to a stronger 2H 2022. Furthermore, European growth already looks substantial and will be a multi-quarter if not multi-year difference maker.”
The Israel-based company executed its initial public offering (IPO) at $18 per share in March 2015. In the seven years since, SEDG shares have appreciated by more than 1,400%. Over the same period, it grew revenues by about 1,370%, from $133.2 million in fiscal 2014 (June year-end) to $1.96 billion in the trailing 12 months ended March 31.
Earlier this year, the company sold 2.3 million of its shares at $295 each, raising net proceeds of $650.5 million. It plans to use the proceeds for general corporate purposes, including possible acquisitions. As a result, SolarEdge finished the first quarter with $1.2 billion in cash and marketable securities compared to just $724.1 million in total debt.
Analysts surveyed by S&P Global Market Intelligence estimate SolarEdge will grow sales by 36.6% annually over the next two years, while profits should jump by 39.3%. Meanwhile, SEDG trades at an enterprise value that’s 6.6 times sales – less than Sunrun (RUN) at 7.5 and Enphase Energy (ENPH) at 16.3. So not only is SolarEdge one of the best high-growth stocks on the market right now, but it’s also a relative value.
- Market value: $9.7 billion
- Analysts’ ratings: 9 Strong Buy, 5 Buy, 3 Hold, 0 Sell, 0 Strong Sell
- Analysts’ consensus recommendation: 1.65 (Buy)
Paylocity Holding (PCTY, $175.09) provides payroll and human capital management (HCM) software solutions. Its competition includes Paycom (PAYC), Ceridian HCM Holding (CDAY) and Automatic Data Processing (ADP).
Like many of its competitors, most of Paylocity’s revenue is recurring, making the sales process a little easier. In the first nine months of fiscal 2022 (June year-end), its revenues increased to $620.8 million, up by 33.4% from $465.2 million in the same period a year earlier. On the bottom line, its adjusted EBITDA was $178.5 million – 34.4% higher than the $132.8 million it earned a year ago.
Paylocity expects to finish fiscal 2022 with revenue of $841.2 million at the midpoint of its guidance, 32% higher than fiscal 2021. In addition, its outlook for adjusted EBITDA is $229.5 million at the midpoint, which would be 35% higher than in 2021. Should the company meet its 30% revenue projection in Q4, that would mark the fourth consecutive quarter that PCTY has registered at least 30% growth.
The company estimates that the total addressable market (TAM) of businesses with between 10 and 5,000 employees is $16 billion. It currently has 2% of the 1.3 million businesses in this market. Paylocity gets a significant portion of its new clients from ADP and Paychex (PAYX).
Paylocity invests heavily in research and development (R&D) to continue growing. Over the past five fiscal years, it has more than doubled its R&D spending from $39 million in fiscal 2017 to $94 million in 2021. Over the same period, R&D spending per employee per year (PEPY) jumped 47% to $420.
Paylocity has a chance to remain among Wall Street’s best high-growth stocks despite the industry’s intense competition.
“Given the nature of the macro, we continue to believe PCTY remains one of the more attractive names in software given its ability to take price and benefit from a rising rate environment,” says Needham’s research team, which rates the stock at Buy.
- Market value: $3.7 billion
- Analysts’ ratings: 4 Strong Buy, 3 Buy, 1 Hold, 0 Sell, 0 Strong Sell
- Analysts’ consensus recommendation: 1.63 (Buy)
If Innovative Industrial Properties (IIPR, $132.82) looks familiar, perhaps you read about it in Kiplinger’s best marijauana stocks to buy now.
Unlike many of the names on this list of high-growth stocks, IIPR is a real estate investment trust (REIT) that owns greenhouses and industrial facilities that are retrofitted to accommodate medical marijuana licensed producers. It currently owns 105 in 19 states.
S&P Global Market Intelligence suggests that IIPR’s revenues have grown by 238.9% annually over the past five years. Over the next two, this REIT is projected to grow revenues, on average, by 30.1% and 26.1%, respectively.
That’s extremely healthy growth for a REIT.
In April, Innovative Industrial Properties was targeted by short seller Blue…
Read More: The 10 Best High-Growth Stocks to Buy | Kiplinger