With third-quarter earnings season all but wrapped up, we can take a look back and weigh how certain picks fared and why. I already broke down results coming out of the biggest tech stocks and one company in particular stood out … but not in a good way.
Twitter (TWTR), as you likely recall, face-planted this earnings season thanks in large part to unimpressive user growth — a statistic that fueled chatter about the site being a ‘niche’ service and poured gasoline on the stock’s implosion.
Here’s the thing, though: Having a niche isn’t inherently a bad thing. It’s only problematic in context; when you’re a hyped service with the supposed potential audience of “The Internet” and in turn a valuation that demands big-time growth, then yeah, struggling to acquire new users is going to be a problem.
Another third-quarter failure tells a similar story. Whole Foods Market (WFM) was bid up as its once-niche organic offerings showed mainstream potential … but then got beaten down as expectations and expansion got out of hand.
When growth expectations are in line with reality, though, a niche can actually be a positive thing — read: “competitive moat” or “consistent market.”
In fact, take a look at these three companies whose niche focus is paying off.
Great Niche Stocks to Buy: Stamps.com (STMP)
The audience for stamps isn’t necessarily niche — it’s not just hobbyists that need stamps, of course, but also everyday folks and (more importantly) just about all businesses — but the offering itself definitely is.
That’s a great combo — and one that’s paying off.
Even after cooling off a bit last week, shares of Stamps.com have more than doubled since the start of 2015. Over the last five years, earnings growth has averaged just below 30% per year … while another 20% annualized rate (nearly quadrupled the expected growth rate of the S&P 500) is on tap for the coming five years.
In fact, analysts are getting more and more optimistic; the earnings consensus for 2015 has jumped by 12% over the last three months, while the consensus for 2016 has expanded by over 13%.
Even better: Stamps.com is actually posting organic earnings growth, as approximately 40% sales growth is expected in coming years.
Great Niche Stocks to Buy: Ebix Inc. (EBIX)
Our next company is similar in the sense that it has an e-commerce tie-in with a business-to-business application and with an obvious specialty.
Oh, and in the sense that shares are on fire this year. While many enterprise software, IT and e-commerce picks cast a wide net, Ebix Inc. (EBIX) has honed in on the insurance market, offering “on-demand” software and e-commerce solutions to insurance companies.
Focusing on insurance specifically could perhaps put a ceiling on the company’s growth. That doesn’t seem to be the case, though. Instead, the specialty is paying off with consistent growth on the top and bottom lines.
In the most recent quarter, for example, sales grew 32% year-over-year (and 38% on a constant currency basis) while earnings expanded by 24%. That represented a year-long streak of earnings beats, all topping analyst expectations by at least 14%.
Great Niche Stocks to Buy: Electronic Arts (EA)
Last but not least, we have Electronic Arts (EA) — a company that’s part of the “Toys/Game/Hobby industry” according to its Zacks description. EA has also been on a tear this year, with shares gaining almost 50% even as the broader market has barely budged.
That upward momentum is thanks in part to the fact that earnings skyrocketed over the last year. At the same time, Electronic Arts has also consistently topped analyst expectations and continues to enjoy upwards revisions for coming quarters.
It just shows that focusing on a specific hobby, industry or general niche is hardly a death wish for a company, despite the fact that it has spelled trouble for picks like Twitter and Whole Foods Market of late.
As always, the key is keeping expectations (and in turn valuations) in line with what a particular niche has to offer … and how big or growing that niche might be.
Alyssa Oursler is based in San Francisco and writes about technology, investing, gender and entrepreneurship. Her work has appeared on Forbes, Business Insider, MSN Money and more. You can follow her on Twitter here or check out her personal site here. As of this writing, she did not hold a position in any of the aforementioned securities.