It was in 2013 that Wharton finance professor Jeremy Siegel opined that stocks will remain the best bet in the years to come. Even as markets trade near all-time highs, this opinion is unlikely to change. However, investors need to be careful in terms of picking growth stocks and having a diversified portfolio.
In a well-diversified portfolio, stocks from mature industries provide an attractive dividend and help in reducing the portfolio beta. On the other hand, high-growth stocks serve as catalyst for upside in portfolio returns.
Therefore, growth stocks are important to hold in the portfolio. This column will discuss four growth stocks to buy that are likely to benefit from behavioral changes due to the novel coronavirus pandemic.
These stocks have a robust earnings growth outlook for the next five years. Further, it’s likely that earnings growth can potentially accelerate due to the pandemic impact on the way business is done.
Growth Stocks to Buy: Etsy (ETSY)
With a projected annual earnings growth of 26.5% for the next five years, ETSY stock is among the attractive growth stocks to buy.
Given the company’s business model of connecting buyers and sellers online, it stands to gain from changing trends. With the novel coronavirus pandemic, sellers are increasingly looking at setting up an online store. Etsy will benefit from this in the coming years.
An early indication of this is already visible in the company’s second quarter results for 2020. The company reported a 136% surge in revenue and a healthy 35% growth in adjusted EBITDA. Among the positive trends, Etsy witnessed healthy growth in repeat and habitual buyers. With the company having a global presence, there is a big addressable market. According to Etsy, it’s in the range of $1.7 trillion.
The company’s free cash flow has grown from $28 million in the first quarter to $220 million for Q2. With an annualized FCF of $880 million, the company is well positioned to create value. Further, as earnings growth remains robust, FCF growth is also likely to be strong.
For the current year, ETSY stock has moved higher by 180%. However, I believe that there is more upside in the coming quarters. Given the current trend, the company is likely to surprise in terms of earnings growth and that will keep the stock momentum positive.
JD.com (JD)
I like JD stock from a growth perspective and also from the perspective of regional diversification. JD.com provides investors with exposure to the largest retail market in the world. It’s not surprising that the company’s earnings growth is likely to be robust in the coming years.
Last month, the company reported that second-quarter revenue increased by 33.8%. In addition, the company reported strong growth in annual active customer accounts. This trend is likely to sustain with the company making inroads into semi-urban and rural markets.
One factor that sets JD.com apart from other Chinese e-commerce players like Alibaba (NYSE:BABA) and Pinduoduo (NASDAQ:PDD) is its robust logistics network. This gives JD.com a relative edge when it comes to market penetration in China.
For the last financial year, the company reported free cash flow of 19.5 billion yuan ($2.85 billion). Strong FCF allows the company to pursue aggressive organic and inorganic growth. Recently, the company acquired Kuayue-Express Group, which is an integrated express transportation enterprise specializing in “limited-time express service” in China.
Overall, JD.com has a strong growth visibility, steady improvement in margins and ample financial flexibility. These factors make JD stock attractive for the coming years and I expect the upside momentum to sustain.
Netflix (NFLX)
For the next five years, analysts expect the company’s annual earnings growth at 30%. Without doubt, NFLX is an attractive growth stock to buy for the portfolio. As earnings growth remains healthy, NFLX stock has been trending higher.
However, the company has witnessed strong subscription growth during the pandemic as people look for a source of entertainment during quarantine.
In the second quarter, the company added a record 10.1 million paid membership as compared to 2.7 million in the same quarter a year ago. I would not be surprised if earnings growth guidance is revised on the upside for the coming years.
Original content is the key to sustained growth. For the most recent quarter, the company reported $899 million in FCF. As the company’s financial strength increases, there will be headroom for investing in quality content.
Netflix also has global presence with more subscribers outside the United States as a percentage of total subscribers. Therefore, the addressable market is significant and is another factor that will ensure that strong earnings growth sustains.
Shopify (SHOP)
SHOP stock is another attractive name among the growth stocks to buy. I like the company’s business model, which is likely to ensure steady cash flows over the long term.
For the second quarter, the company reported 97% revenue growth on a year-on-year basis. The important point to note is that revenue from subscription solutions has been trending higher. The company has subscription solutions for entrepreneurs, small-and-medium business as well as large brands.
As subscribers swell, the revenue and cash flow visibility increases. Further, brands generally start with the basic plan as advance to premium plans as business growth. Therefore, existing customers contribute to higher cash flows over time.
Shopify also happens to be one of the businesses that has witnessed strong growth after the novel coronavirus pandemic. New stores created on the platform in in the second quarter increased by 71% as compared to the first quarter. With a global presence, strong customer addition can translate into upwards revision in earnings estimates. This is likely to keep the momentum strong for SHOP stock.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.
