Here at InvestorPlace, we have an entire section of our website dedicated to hot stocks to buy in a variety of industries, from quantum computing to marijuana stocks.
The problem with many of these hot stocks is that they go cold — and stay cold — for a long time. It’s one thing to identify a hot stock — out of 1,300 stocks with a market capitalization greater than $2 billion, Novavax (NASDAQ:NVAX) has the best performance year to date, up 1,951.26% through July 2 — it’s another to identify a hot stock that will still be leading the pack in five or 10 years from now.
Successful portfolio managers get paid so much because it’s darn near impossible to find one or two that keep the pedal to the metal for an extended period. It’s why the investment community so reveres Warren Buffett.
It’s also precisely why passive investing has become so popular. Investors have also come to realize it’s a mug’s game to find hot stocks that stay hot.
Still, it’s our goal to at least point out the possibilities. What you do with this information is up to you.
For this particular article, I’ve selected hot stocks with market caps greater than $2 billion, have year-to-date performance of at least 100%, and are profitable on a non-GAAP basis.
- Twilio (NYSE:TWLO)
- Tesla (NASDAQ:TSLA)
- DraftKings (NASDAQ:DKNG)
- Livongo Health (NASDAQ:LVGO)
- Teladoc Health (NYSE:TDOC)
- DocuSign (NASDAQ:DOCU)
- CrowdStrike (NASDAQ:CRWD)
From the three criteria, I hope to find seven hot stocks to stay hot for years to come.
Hot Stocks to Stay Hot: Twilio (TWLO)
Market Cap: $33.1 billion
YTD Performance: 136.4%
Non-GAAP Profit: $6.1 million (Q1 2020)
I’ve been a fan of Twilio’s for some time. I first mentioned the platform-as-a-service company in June 2017. At the time, I suggested that investors worried about the fact it didn’t have free cash flow or profits but liked the company, should consider hedging their bets by investing in the SPDR S&P Internet ETF (NYSEARCA:XWEB).
Since then, TWLO stock has gained 774%, while XWEB is up 64% over the same period. Either way, you would have done alright, although betting on the latter would have dramatically reduced your company-specific risk.
Three years later, Twilio delivered a non-GAAP profit of $6.1 million or six cents in the first quarter of 2020, 79% higher than Q1 2019. Due to more shares outstanding, the six-cent non-GAAP profit was just 20% higher year over year.
In 2017, I also wrote the following:
The number of active customers has increased in each of the last four quarters—that’s a good thing. Now, the dollar-based net expansion rate means active customers for a year or more are spending between 141% and 170% more each quarter than they did in the corresponding quarter a year earlier. As long as that number is solidly above 100% and active customers keep growing, the top-line will continue to prosper—and to date it has.
In Q1 2017, it had 40,696 active customers. In Q1 2020, it had more than 190,000 active customers, almost five times more. Also, the Dollar-Based Net Expansion Rate in the first quarter was 143%, well above 100%, which means it continues to grow revenues at a significant pace.
I don’t see Twilio slowing down anytime soon.
Market Cap: $247.7 billion
YTD Performance: 188.9%
Non-GAAP Profit: $227 million (Q1 2020)
At news outlets around the world, the July 1 headline, “Tesla overtakes Toyota to become the world’s most valuable carmaker,” must have been a thing of beauty for those who’ve been long TSLA stock since it went public in June 2010 at $17 a share.
A $10,000 investment in Tesla at its IPO is today is worth almost $800,000. It’s a big reason why CEO and Tesla’s largest shareholder, Elon Musk, is now 14th on the Bloomberg Billionaires Index. Heck, Musk’s net worth is up more than $20 billion since March alone.
It’s hard to believe, but Musk could give Jeff Bezos a run for his money in the next 2-3 years if the brilliant visionary continues to develop new products car and truck owners enjoy.
The fantastic thing about Tesla’s development is that it now generates a trailing 12-month free cash flow of close to $1 billion. I can remember a year ago when media pundits were questioning Musk’s claims that the company would generate positive free cash flow in future quarters, except when releasing new products that required additional capital expenditures.
Over the past year, it’s had quarterly free cash flow of $614 million, $371 million, $1.01 billion, and -$895 million. Hitting three for four in your career gets you your wing at the Baseball Hall of Fame.
In 2012, I said America needs more Teslas. Eight years later, the statement is more valid than it’s ever been.
Market Cap: $11.5 billion
YTD Performance: 209%
GAAP Loss: $68.7 million
I know I said I would only include companies that had at least a non-GAAP profit in the latest quarter. However, the potential for DraftKings is so high, in my opinion, that I couldn’t leave it off my list of hot stocks to stay hot for years to come.
InvestorPlace contributor Joey Bennett recently discussed how the return of sports would put a little extra jump in its stock price as online players such as DraftKings take a big chunk of the U.S. gambling business.
“The story of DraftKings is one of an industry emerging from its infancy, experiencing the usual growing pains. But the evidence supports McTernan and Iyer’s optimism. Online gambling accounted for 12% of total industry revenue in 2019,” Bennett wrote on July 6.
“However, in New Jersey, which McTernan sees as ‘emblematic’ of the industry’s future, 90% of gambling revenue came from online betting.”
In mid-June, I argued that DraftKings stock was worth betting on, regardless of what happens to sports in the near term. Simply put, the long-term potential for sports betting on a global basis is enormous.
It might not make money today, but in 3-5 years, you can be sure that DraftKings will be profitable. If it isn’t, I’ll be astonished.
Further, of all the hot stocks on this list, DKNG could be the strongest performer over the next decade. And that includes a formidable opponent in Tesla.
Livongo Health (LVGO)
Market Cap: $7.6 billion
YTD Performance: 190.5%
Non-GAAP Profit: $3.9 million (Q1 2020)
I don’t think Livongo Health will ever become a large company like Tesla. Still, it possesses a data science and technology-enabled platform that should continue to be an important tool for employers, health plans, and government entities to utilize to lower health care costs while ensuring America has a healthy workforce.
How much is that worth to investors? $10 billion? $20 billion? It’s hard to know where the ceiling is.
In the meantime, Livongo is growing its top-line revenues by more than 115% a quarter. It’s number one product — Livongo for Diabetes — has more than 328,000 members, up 100% over the same period a year earlier. As for the number of clients — employers, health plans, etc. — at the end of March it had 1,252, 44% higher than in the fourth quarter of 2019.
At the end of the first quarter, it had $89 million in new agreements or expansions to existing clients in place, 85% higher than a year earlier.
By virtually every metric, it is growing like a weed. In 2020, Livongo expects revenues to increase at least 70% to $290 million, $10 million higher than its original guidance for the entire year.
With an asset-light business model, I find it hard to believe Livongo’s revenues are going to slow anytime soon. Further, it has more than enough cash to survive the novel coronavirus and anything else Mother Nature chooses to throw at the world.
I see LVGO as the diamond-in-the-rough of the seven hot stocks on my list. It’s going to surprise a lot of people in the future.
Teladoc Health (TDOC)
Market Cap: $18 billion
YTD Performance: 149.5%
Non-GAAP Profit: $10.7 million (Q1 2020 adjusted EBITDA)
In the first quarter, the virtual health care company saw its revenue increase 41% to $180.8 million from $128.6 million a year earlier. A significant portion of its revenue is generated on a contractually recurring, subscription access fee basis.
So, let’s say a Fortune 500 company joined one of its programs — its corporate clients include 40% of all Fortune 500 companies — the company would pay a monthly fee based on the number of members it wanted to access Teladoc’s virtual healthcare services.
Subscription access fees in fiscal 2019 accounted for 84% of its overall revenue. The remaining 16% was from visit fees for individuals and clients who prefer a visit fee only (VFO) arrangement.
During Covid-19, it’s become increasingly clear that virtual healthcare isn’t a fad, and that’s excellent news for TDOC shareholders.
In the first quarter of 2020, Teladoc’s revenue from subscription access fees increased by 33% in the U.S. and 17% internationally. It’s important to note that the company’s visit fee revenue in the first quarter increased by 93% to $43.7 million, accounting for more than 24% of its overall business, up more than 800 basis points from fiscal 2019.
By every metric, Teladoc’s services and revenues for those services are growing exponentially. In the first quarter, it delivered more than two million visits around the world. The healthcare industry is stronger for it.
Market Cap: $34.9 billion
YTD Performance: 157.3%
Non-GAAP Profit: $24.1 million (Q1 2021)
Until recently, I hadn’t been anywhere close to recommending Docusign for anything I’d ever written for InvestorPlace. Then I did a story about stocks to buy for the new normal, and it suddenly jumped into the picture.
The company announced in the first quarter that it had almost 661,000 paying customers for products such as its eSignature digital signature and many others. As more companies move to a permanent work-from-home workforce, Docusign’s going to be a significant beneficiary of that transformation.
I’m not the only one at InvestorPlace who thinks that Docusign’s got a bright future.
“An investment in DOCU stock is more than just an investment in eSignature technology,” McCall wrote on July 2.
“While that’s certainly the firm’s most well-known product, DocuSign has been working to build out its service into a comprehensive contract management tool. The firm has been expanding its offerings to include a wide range of services.”
With the acquisition of Seal Software, a customer can use its data analytics to determine if there is anything in a particular contract that they might have missed or misunderstood. The second acquisition of SpringCM ensures that contracts in force remain up to date.
As McCall points out, the digital signature business is expected to grow to $5.5 billion and Docusign is an industry leader. Convert some of those clients to its other contract management tools and the revenues, and perhaps even more importantly, its profits, will keep rolling in.
I consider Docusign to be the modern-day equivalent of Adobe (NASDAQ:ADBE). And that’s a compliment.
Market Cap: $23.1 billion
YTD Performance: 113.3%
Non-GAAP Profit: $4.5 million (Q1 2021)
CrowdStrike’s stock gained 8% on June 1 after several news reports hinted that the endpoint cybersecurity company would deliver strong first-quarter results. Zacks Equity Research suggested that it would have an adjusted loss of 6 cents on $165.94 million in revenue.
CRWD beat on both the top- and bottom-line reporting a non-GAAP profit of 2 cents on $178.1 million in revenue. Revenues in the quarter grew by 85% while profits rose an astounding 104% over last year.
“As a result of our strong execution across the quarter and continued focus on unit economics, we drove substantial operating leverage, reduced GAAP operating loss and achieved non-GAAP operating profitability for the first time in company history,” stated chief financial officer Burt Podbere in the company’s earnings release.
“While continuing to aggressively invest in our business, we generated record positive cash flow from operations and free cash flow.”
In fact, over the past nine quarters, CrowdStrike’s annualized free cash flow has gone from -$90 million to $120 million, a 233% turnaround from fiscal 2018.
Interestingly, I thought CrowdStrike stock was due for a correction last October, possibly trading in the low-to-mid $40s. It didn’t quite fall that low in the final calendar quarter of 2019 but did drop below $40 in mid-March when the entire market took a tumble.
Those lucky souls who bought around $39 are sitting on an easy double and then some in just three short months.
Where to next? I couldn’t tell you. However, in 3-5 years, $500 seems like an easy target, given its growth. I expect it to remain hot for most of this time.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.