When it comes to analyzing growth stocks, investors have a myriad of ways to slice and dice them. For today’s exercise, I’ll be breaking them up within the hottest sectors.
So, which of the markets sectors are hot?
Let’s have a look at the S&P 500 index and sector performance over the past year to get a pretty accurate picture. Overall the S&P 500 has performed well of late — it’s up 16.03% over the past year, including a 2.58% gain so far into 2021. But we can get more granular and break it up based on sector performance.
So, let’s take the top five performing — specifically information technology, consumer discretionary, materials, communication services and healthcare — and find the growth stocks within them. This is where investors can find real growth that should outstrip not only the broader markets but also the stronger sectors therein.
These seven stocks should be primed for growth.
- Etsy (NASDAQ:ETSY)
- Chegg (NYSE:CHGG)
- Square (NYSE:SQ)
- Horizon Therapeutics (NASDAQ:HZNP)
- Teladoc Health (NYSE:TDOC)
- Peloton Interactive (NASDAQ:PTON)
- Huntsman Corp. (NYSE:HUN)
Growth Stocks: Etsy (ETSY)
Etsy has had a very strong period of success over the past year. The result has been that ETSY stock has risen from about $50 per share to its current price of over $200. That’s roughly 300% growth. That means a $5,000 investment early in 2020 would have grown to about $20,000 by today, just 12 months later.
Etsy has created a platform for handmade goods sellers which has taken off. Revenues through the first three quarters of 2020 rose 128.1% year-over-year, contributing to Wall Street analysts’ giving it a strong buy rating. In the same period, Etsy’s income rose an astounding 520%.
Some 69 million customers made a purchase from Etsy in Q3, with 14.8 million of them being first-time buyers. However, the company also indicates that its revenue base is mainly return buyers, which means the company likely has great customer satisfaction and service.
The company is also making efforts to allay investor fears that items like face masks, which have received a lot of consumer interest, are not solely responsible for its 2020 results. In Q3, existing buyers spent 50% more per purchase than in the previous year, even when excluding mask purchases.
Chegg is an independent learning and tutoring platform which provides resources for education across all subjects. Its resources help students on tests, to get strong grades and also to gain university admissions.
Surely, one reason that the company has grown in the past year, as CHGG stock more than doubled, is due to the Covid-19 pandemic. Schools are closed or partially shuttered, and students need extra resources. So Chegg naturally has received a boost. But I, or any investor, would be remiss to dismiss its progress solely to the pandemic. The truth is that the trend toward tutoring and proactive education outside of traditional schooling began far earlier.
Private tutoring in the U.S., online or otherwise, is anticipated to see compound annual growth rate (CAGR) of 8% between 2019 and 2023. There is a burgeoning market as American students seek to become more competitive globally. That transition makes Chegg already perfectly poised for growth. The pandemic simply helped.
Chegg revenues increased 64% in Q3 YoY, while subscriptions rose by 69%. Parents, students and teachers have surely realized that extra resources for improving educational outcomes are necessary during the pandemic. Chegg is poised to continue growing due to its strong platform.
Square helps sellers with point of sale and payment systems. Its solutions are much more design forward than the traditional POS systems which it is disrupting. But Square’s utility is also a strong point. The result is a growth company and stock seriously worth investor consideration.
The company saw a profits grow at a 40% CAGR between 2015 and 2019. And revenues absolutely rocketed in 2020. Through the first three quarters of 2019 Square recorded $3.4 billion in revenues. In 2020, that figure was above $6.3 billion, with more than $3 billion in revenues in Q3 alone.
Bitcoin revenue has driven the majority of the increase, which may be causing some trepidation in the markets regarding SQ stock. I see it more as the firm’s ability to identify and capitalize on market opportunities than a risk. Wall Street may not view shares as a slam dunk, but it is generally positive. I think Square should continue upward.
Horizon Therapeutics (HZNP)
Horizon Therapeutics develops drugs for rare diseases and for rheumatic diseases. It is a company which has had a strong year despite real, tangible problems caused by the pandemic. Many pundits broadly note that Covid-19 has caused disruptions to businesses everywhere. While this is true, Horizon Therapeutics was more directly hurt than many. Despite adversity, HZNP stock triumphed.
One of the company’s key growth drivers is its drug called Tepezza, a treatment for thyroid eye disease. The drug is manufactured under contract by a company called Catalent (NYSE:CTLT). Catalent was ordered to direct production to vaccines in December under the Operation Warp Speed program. The result was that Horizon suddenly found itself with a drug supply shortage for one of its two key growth drivers.
The company managed to secure increased manufacturing scale and found a solution to its problem. Still, Tepezza actually exceeded sales guidance given prior to the production disruption. The company exceeded the high end of sales guidance, representing 65% YoY growth.
Teladoc Health (TDOC)
TDOC stock has more than doubled in the past year. Like so many other sectors, online medicine has gotten a boost from the pandemic. Teladoc Health is a leader in this quickly growing field. The field itself is expected to experience 23.5% CAGR from 2019 to 2026. And the total addressable market should hit roughly $185.66 billion in value at that time.
Through the first three quarters of 2020, Teladoc revenues grew by 79% over 2019. Sales were particularly strong in Q3, more than doubling.
Teladoc recently acquired Livongo. Livongo focuses on conditions such as diabetes, hypertension, weight management, and behavioral health and complements Teladoc well. Market trepidation around TDOC stock stems from a clear end in sight to the pandemic but this is a leader in a growth sector.
Peloton Interactive (PTON)
Peloton Interactive now has over 3.6 million members. The company has successfully merged fitness and streaming classes in a way that consumers and investors appreciate. That appreciation has led to PTON stock rising by leaps and bounds over the last year. In fact, shares are up more than 420% in that period.
Q1 2021 continued Peloton’s strong performance. Revenues increased 232%, to $757.9 million. And the company gave guidance that it expects to hit $1 billion in revenues in Q2. It looks clear that the trend of working out at home is here to stay, so even after the pandemic passes and people have the option to return to the gym, Peloton has already proven that it has something that gyms don’t, but the Biden White Houses does.
As long as consumers can be more motivated and workout more through Peloton, it should rise. Peloton managed to incentivize subscribers to workout more often during 2020. In Q4 of 2019 subscribers averaged 12 monthly workouts. That figure grew to nearly 25 in Q4 2020. Exercise is much more than individual will power, and Peloton knows the formula well.
Huntsman is a Texas firm that manufactures chemicals for a range of industries. The company’s strong growth has led 18 of the 21 analysts who cover the stock to give it a “buy” rating. The materials sector of the S&P 500 has grown by nearly 25% over the past year and HUN stock is a strong player in the group.
The company has transitioned to a business that relies on polyurethanes over the past decade and a half. Today polyurethanes make up 59% of its revenues but only five years ago that figure was closer to 30-35%. Huntsman has a diversified business despite its seeming over-reliance on polyurethanes.
The materials sector is a hot one, and Wall Street agrees that the company is in position to take advantage of market dynamics.
The company has also been shrewd in its approach to corporate strategy. Huntsman was leveraged to a much higher degree as recently as 2015. In 2015 the company had net debt nearly four times as high as EBITDA. In 2021 the firm anticipates that figure to have dropped to 1.1x.
That should drive investors to HUN stock as equity prefers not to service debt, but rather, earnings.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.