The S&P 500 makes it easy to invest in the stock market. The famed index has 500 holdings and periodically replaces underperforming stocks with more promising picks. Many investors who don’t know much about the stock market prefer to invest in passive index funds that mirror benchmarks like the S&P 500.
However, there is a science for investors who want to outperform the S&P 500. One way to beat the index is to anticipate which stocks are likely to be added to the index in the future. A corporation must be profitable over the trailing 12 months and in the most recent quarter to be eligible. Publicly traded corporations must also fulfill a market cap requirement and fulfill other parameters.
These three growth stocks are potential S&P 500 additions within a few years. Buying shares now can result in long-term gains for patient investors.
E.l.f. Beauty (ELF)
E.l.f. Beauty (NYSE:ELF) is a cosmetics brand that continues to gain market share in the cosmetics industry. The stock has been a bit volatile lately but still holds onto an impressive 20% year-to-date gain. Shares are also up by almost 1,000% over the past five years, demonstrating the types of returns investors can find by looking beyond the S&P 500.
The beauty company has a $10 billion market cap, so it’s still removed from the minimum market cap requirement of $18.0 billion. However, e.l.f Beauty’s fourth quarter results suggest it can reach the market cap requirement within a few years.
The firm reported 71% year-over-year (YOY) revenue growth in Q4 FY24. That growth helped e.l.f Beauty secure its first fiscal year of net sales above $1 billion. The company also gained market share for the 5th consecutive year and offered encouraging fiscal 2025 guidance. E.l.f. Beauty also delivered its 21st consecutive quarter of net sales and market share growth.
Duolingo (DUOL)
Duolingo (NASDAQ:DUOL) recently became profitable and is still delivering elevated revenue growth. The company reported $27.0 million in Q1 2024 net income compared to a net loss of $2.6 million in the same quarter last year. Duolingo also reported 45% YOY revenue growth as the company reached 97.6 monthly active users.
People are flocking to the educational app to learn new languages. Duolingo’s expansion into additional school subjects has increased its popularity. The boon can result in meaningful appreciation for long-term investors, but the stock hasn’t generated much momentum since its IPO. Shares are down by 25% year-to-date and have only gained 19% since its 2021 IPO.
Duolingo’s P/E ratio should drop considerably as the company releases more earnings reports that showcase impressive net income growth. The stock is valued at a little under $8 billion, so it can take several years before Duolingo is a viable candidate for the S&P 500.
CommVault Systems (CVLT)
CommVault Systems (NASDAQ:CVLT) has the lowest market cap out of the stocks listed. The cloud security company has a $5.4 billion market cap and a 32.6 P/E ratio. The company is up 54% year-to-date and has logged a 144% gain over the past five years.
The company’s revenue has been accelerating in recent quarters. While fiscal 2024 revenue increased by 7% YOY, revenue in the fourth quarter jumped by 10% YOY. CommVault Systems’ focus on subscription revenue should result in more acceleration in future quarters.
Subscription revenue made up more than half of total revenue in the fourth quarter and grew by 27% YOY. As subscriptions make up a larger percentage of CommVault Systems’ business, growth rates should continue to increase. CommVault is also profitable and allocated $184.0 million toward stock buybacks in fiscal 2024.
CommVault Systems does not receive much attention from Wall Street analysts. However, it is rated as a Moderate Buy with the highest price target of $140 per share, implying a potential 15% gain.
On this date of publication, Marc Guberti held long positions in ELF and CVLT. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
