The decimation of stocks at the beginning of October is like clockwork. Seasonally speaking, stock markets tend to face more volatility this month. After the ISM (Institute of Supply Management) posted a 47.8 reading, the lowest figure seen since 2009, markets erased the entire Q3 rally in the first two days of October.
The weak employment numbers did not help matters, either. The ADP National Employment Report indicated an increase of 135,000 jobs from August to September. This is below the previous figure of 157,000, posted the month before.
As stocks fall to better valuations, investors have three main options. They could buy value stocks trading at a steeper discount. Another option is to buy growth stocks whose valuations are at better levels. The third option is to do nothing and to hold ample levels of cash. The first option of buying cheap stocks exposes investors to the risk of buying value traps. Such stocks could keep falling and will not recover when the market bounces back.
Holding cash is not a great choice either because investors are forced to try to time the market. Doing so with any success depends on luck. So, investors should hunt for growth stocks whose prospects are still strong but whose stock price happens to fall with the market.
For growth investors, seven of the best stocks to buy are listed below.
Nokia Corporation (NOK)
Nokia’s (NYSE:NOK) inconsistent quarterly results are holding the stock back. The market sell-off sent NOK stock back to 52-week lows, even though the company continues to win big 5G contracts. On Sept. 29, Japan’s telecom firm KDDI selected Nokia for its 5G upgrade.
As its primary partner to upgrade its network from 4G to 5G, Nokia will install its radio access solution AirScale. With this approach, KDDI will get support for both 4G and 5G operations. Nokia is an existing supplier to KDDI and the two firms have a strong relationship that is over two decades old.
To support the need for ongoing R&D activities, Nokia showcased its Future X Lab in Finland. This will enable customers to take a look at Nokia’s 5G offerings. Nokia will demonstrate its technologies and innovations to customers at the “Experience Zone.”
Nokia’s Q2 revenue growth of 2.52% Y/Y and an EPS of $0.056 signals a profitable path ahead. Plus, management reiterated its commitment to a dividend of up to EUR 0.20 (US $0.22) annually. Income investors seeking growth get rewarded a dividend that yields around 4.5%.
For the full year 2019, Nokia forecasts earnings per share of EUR 0.25 – 0.29 (US $0.27 – $0.32). In full-year 2020, EPS will soar to EUR 0.37 – 0.42 (US $0.41 – $0.46). Winning 5G contracts due to its strong end-to-end portfolio is a key component driving Nokia’s growth over the next two years. If investors are betting that Nokia’s revenue growth accelerates, then the stock is worth around $6.00, over 20% above its recent price.
Bristol-Myers Squibb Company (BMY)
Since August, Bristol-Myers Squibb (NYSE:BMY) continued on an uptrend after the stock bottomed at around $43. BMY stock also offers a dividend yielding 3.2%. Bristol-Myers’ ambitions in developing drugs for treating cancer is a growth catalyst.
Opdivo and Yervoy are the drugs in a dual IO therapy regimen for treating metastatic melanoma. The company has encouraging data for treatment in prostate cancer, cervical cancer, and 2L esophageal diseases.
Its investment in Nektar Therapeutics (NASDAQ:NKTR) is promising. Nektar’s Phase 1/2 clinical trial, PIVOT-02, is studying the combination of NKTR-214 with Opdivo in patients with advanced metastatic triple-negative breast cancer (TNBC). The DCR (Durable CT-induced complete response) from the treatment is good and AE (adverse events) is very low. This suggests that with good data points, BMY and Nektar are likely to get approval.
Once the regulators approve Bristol-Myers’ acquisition of Celgene, markets should reward BMY stock with a higher valuation. Celgene is selling OTEZLA, which should satisfy the FTC. BMY expects the deal will close late this year or early next year. The combined firm will achieve a $2.5 billion of run-rate synergies by the third year together. And as future cash flow grows, BMY will pay down its debt upfront to avoid excess initial leverage.
In targeting a gross debt to EBITDA ratio of under 1.5 times in 2023, Bristol-Myers is one of the strongest drug stocks that growth investors should hold.
Johnson Controls International (JCI)
Although Johnson Controls (NYSE:JCI) paid out its quarterly dividend of 26 cents per share on Oct. 4, growth investors may hold the stock at these levels to get a dividend yielding around 2.4%. Markets sent the stock to 52-week highs after JCI posted a very strong Q3 earnings report. It reported a non-GAAP EPS of 65 cents after revenues grew 2.7% Y/Y to $6.45 billion. Fundamentals are strong and top-line momentum continues across the entire business.
JCI transformed its portfolio by closing the sale of Power Solutions as well as shedding non-core businesses. As a leaner and more focused firm, JCI will grow EPS by 39% this year and 33% next year. In the last quarter, organic field orders grew 6% while the backlog grew 7% to $9 billion. Strong visibility for the next quarter and into FY2020 removes any uncertainties on JCI stock. When market selling pressure is accelerating for October, JCI’s clear outlook is welcome for growth investors.
Even if the economy is slowing slightly, JCI will still grow the sale of HVAC and controls in North America. Last quarter, organic sales grew by 4%. Plus, its favorable volume leverage more than offset an unfavorable mix. Expect minimal selling pressure on Johnson Controls stock because of strong growth for its building solutions unit globally. But in case of business weakening, JCI already cut corporate expenses by 13% last quarter. Cost synergies and productivity savings, along with cost reductions from the Power Solutions sale, will keep the company lean and profitable.
The company forecast full-year EPS of $1.93 – $1.95, above the $1.91 consensus.
TD Ameritrade Holding Corporation (AMTD)
Analysts expected TD Ameritrade’s (NASDAQ:AMTD) EPS to grow 50% this year, sharply above the five-year EPS average growth rate of 15%. But when Charles Schwab Corporation (NYSE:SCHW) said it would end commissions for stock trading, AMTD stock plunged. Growth investors should still consider investing in TD Ameritrade not only for the potential short-term bounce back but for the new positive realities ahead.
TD Ameritrade will eliminate the $6.95 commissions for its online exchange-listed stock, ETF (domestic and Canadian), and option trades. Clients only need to pay 65 cents a contract and face no fees when the contract is assigned or exercised. AMTD pioneered the trading and investing experience. In the last few years, its branding strengthened through its think-or-swim trading platform. And before the commission cut, the brokerage offered better rates than its competition.
AMTD forecast a revenue impact of $220-$240 million a quarter, or 15%-16% of net revenues. And although the loss of commission revenue will hurt near-term results, the company enjoys asset growth. On the Q3 conference call, management said that total net new assets may top $90 billion, up from $60 billion in 2016. Strong scores for its client experience and a robust institutional sales pipeline will lift profits in the coming quarters.
Recently, asset growth slowed in both retail and institutional but TD Ameritrade grew faster than its competitors. As long as that trend continues, the company will come out ahead.
Even though these one-time costs are like pocket change, such restrictions threaten Facebook’s growth. But historical growth rates favor outsized growth ahead for Facebook. In the past five years, EPS grew 66% while sales grew an astounding 48%, led by advertising sales on its mobile platform.
On Oct. 3, the New York Times reported Europe’s top court ruled against Facebook. It said that an individual country may order Facebook to take down posts, photos, and videos, and restrict global access to that material. The tougher regulations on internet content is a setback for Facebook. By restricting the freedom of expression, it puts the onus of monitoring and removing content. This may alienate its user base. On Sept. 28, Bloomberg reported that Facebook and WhatsApp must share messages in the U.K. with British police.
Facebook already enjoys tremendous ad revenue growth but the bigger near-term driver is its entry into the online dating market. Singles may now integrate their Instagram and Facebook Dating profile. This should open up a new and profitable market for Facebook.
Facebook may easily surpass revenue growth of at least 15% annually on the low end. In this scenario, a 5-Year DCF Growth Exit model suggests FB stock has a fair value of almost $230.
Morgan Stanley (MS)
The growth potential for financial institutions and investment brokerages may stall in the near-term due to the Fed cutting interest rates. But this rate cut cycle will eventually end, and when it does, growth investors will have many bank stocks to choose from.
Morgan Stanley (NYSE:MS) already warned last month on the impact of a dramatically different rate environment. Lower equity trading will hurt near-term results, too. Still, after falling nearly 20% from its 52-week high, the stock may already reflect the weakness ahead. Growth investors seeking a discount should consider MS stock.
Morgan Stanley’s EPS grew 28% in the past five years but will slow to 7.63% in the next five years. But at a P/E of below 9 times, the market is discounting the potential growth rebound ahead.
In the second quarter, Morgan Stanley produced revenue of over $10 billion, ROE of 11% and an ROTCE of about 13%. This is despite the sharp decline in interest rates and the slowdown in global growth. Strong asset levels and a growing loan balance growth will continue to more than offset the effects of lower interest rates. MS stock barely reacted to the all-time pre-tax profit margin in wealth management.
Morgan Stanley shares are inexpensive relative to the competition. At a 1.7 times market cap/forward revenue, growth investors are getting a fundamentally strong stock at a discount.
Shares of Paypal (NASDAQ:PYPL) broke its upward trend in July and have yet to recover. PYPL stock traded recently at near the $100 range and at 28 times forward earnings, the credit services firm is suitable for growth investors. Its trailing 5-year EPS growth rate was 17% but looking ahead, its 5-year EPS will grow by 19%.
PayPal reduced its reliance on eBay (NASDAQ:EBAY), with the pair announcing the transaction processing exclusivity last year. PayPal’s deal will end on July 2020. eBay chose Dutch payments company Adyen for handling back-end payments. Previously, PYPL benefited from receiving automatic payments from processing eBay transactions. It will lose the back-end business but PayPal will still be the way eBay customers pay for purchases.
PYPL’s second-quarter results added to investor worries when the company reported slowing revenue growth, up 12% Y/Y to $4.31 billion. Still, free cash flow grew 40% Y/Y to $1.035 billion. And the active account growth of 17%, to 9 million, is a respectable achievement. TPV (total payment volume) rose 26% and is consistent with the pace achieved over the last five quarters. TPV for mobile grew 37% Y/Y but is below the average growth rate reported in the last five quarters.
PayPal has an opportunity to grow at a brisk pace. Its benefits from strong customer engagement, as payment transactions continue to increase every quarter. For 2019, PayPal forecasts EPS of $3.12 – $3.17 (non-GAAP) and $2.16-$2.22 (GAAP). A combination of operating margin expansion and operating leverage will increase shareholder returns in the next year at the earliest. With analysts setting an average price target of $128.50, investors should hold PYPL stock for the strong growth.
The author owns shares of Nokia.