Searching for companies to invest in can be an interesting and challenging task using financial analysis. From the huge number of U.S. stocks publicly traded, stock screeners can help a lot to narrow down the list based on some investment criteria.
For this article, the main investment criterion is mammoth growth in 2021.
Growth in stocks can mean a lot of things: growth in earnings-per-share and revenues; free cash flow growth; and even dividend growth. To make things simpler, I chose to focus mainly on earnings growth, a key driver of the stock price. But while growth in earnings is a great feature, it tells us nothing alone. You need to consider other key financial metrics, such as profitability and valuation. Because focusing on earnings growth without looking at the broader financial ratios and trends for the financial performance of stocks can lead you astray.
I used four investment criteria to find three stocks with mammoth growth in 2021:
- Forward PEG ratio around 1
- EPS next year growth estimate over 100%
- 5-year EPS growth estimate over 20%
- Net margin over 10%
This screener finds stocks with a lot of growth potential, profitable companies, and stocks that are potentially undervalued with a PEG ratio forward less or equal to 1.
There are numerous stock screeners available, but for this list of stocks, I used the Stockrover.com stock screener. Also, before mentioning the three stocks and companies to invest in for a lot of growth prospects in 2021, it is interesting to mention that according to multpl.com:
- The current S&P 500 Earnings Growth Rate is -26.64%, reported in June 2020, with a mean of +23.28%
- The current S&P 500 Sales Growth Rate is -0.46%, reported for June 2020, with a mean of +3.6%
Having set the investment criteria at multiples higher than the average for the companies in the S&P 500 leads me to these companies to invest in:
- Credit Acceptance Corporation (NASDAQ:CACC)
- RenaissanceRe Holdings (NYSE:RNR)
- Neurocrine Biosciences (NASDAQ:NBIX)
Companies to invest in: Credit Acceptance Corporation (CACC)
Sector: Financial Services
EPS next year estimate: 103%
5-year EPS growth estimate: 20%
Net margin: 21.8%
According to Yahoo Finance, Credit Acceptance Corporation provides financing programs and other related products and services to independent and franchised automobile dealers in the United States. The second-quarter 2020 earnings were good, as “CACC reported second-quarter 2020 earnings of $5.40 per share, beating the Zacks Consensus Estimate of $4.65.”
The company also reported revenue for the quarter of $406.3 million. This handily beat expectations for $372.7 million.
Credit Acceptance has revenue growth, earnings-per-share growth, operating income growth for all the past four consecutive years. Its trailing price-earnings ratio of 19.7 makes it attractive also.
However, along with earnings growth, there is also debt growth. The long-term debt surged from $3.1 billion in 2017 to $4.5 billion in 2019. Still, its net margin and strong positive free cash flows are both positive financial factors that can support growth in its stock price.
RenaissanceRe Holdings (RNR)
Sector: Financial Services
EPS next year growth estimate: 126.4%
5-year EPS growth estimate: 24.7%
Net margin: 13.1%
RenaissanceRe Holdings Ltd. provides reinsurance and insurance products both in the United States and internationally. Hedge Funds have been bullish on RNR lately according to Insider Monkey. “RenaissanceRe Holdings Ltd. (NYSE:RNR) was in 41 hedge funds’ portfolios at the end of June. The all-time high for this statistics is 30. This means the bullish number of hedge fund positions in this stock currently sits at its all time high.”
Institutional support for stocks is in many cases another driver for significant stock price movement.
The latest year-over-year growth numbers for the fiscal year 2019 are impressive for revenue, net income, and earnings-per-share. The numbers were 103.20%, 229.34%, and 231.77% respectively. Even “Book value per common share increased $17.12, or 14.6%, to $134.27 in the second quarter of 2020, compared to a 7.3% increase in the second quarter of 2019,” according to a press release.
The stock also has a forward dividend of $1.40 for 0.79%.
Neurocrine Biosciences (NBIX)
EPS next year growth estimate: 105.4%
5-year EPS growth estimate: 147.7%
Net margin: 20.4%
Neurocrine Biosciences is a commercial-stage biopharmaceutical company that discovers and develops therapeutics for the treatment of neurological, endocrine, and also psychiatric disorders in the United States. It reported Q2 EPS of $1.42, about double the 71 cents of EPS in the year-ago quarter.
A key catalyst that may be supportive of further revenue growth is news that “Neurocrine Biosciences Inc on Monday launched its add-on treatment for patients with Parkinson’s disease nearly five months after Food and Drug Administration’s approval, as the COVID-19 pandemic delayed its roll out in the United States.”
That was dated back in September.
Analysts expect revenue to rise 43% this year, and with improvements in business conditions related to pandemic coronavirus, further growth for NBIX revenue seems supportive of its stock price. And revenue growth may lead to higher profitability.
On the date of publication, Stavros Georgiadis, CFA did not have (either directly or indirectly) any positions in the securities mentioned in this article.