The market tide appears to be turning in 2023. While growth stocks, particularly tech companies, delivered a terrible performance in 2022 after a spectacular post-pandemic run, the reverse is true this year. Growth stocks are rebounding, while sectors such as energy stocks and regional banks have run into a great deal of trouble. Now that the focus is off rising interest rates and turning to matters such as a potential recession and financial system instability, many traders are looking to take advantage by rotating back into the best growth stocks to buy.
That said, investors should still exercise caution. Many of the 2021 crop of growth firms simply aren’t going to make a comeback. There was a lot of speculative excess during that time period. The market now cares a lot more now about profitability and sustainable, durable business models than it did back then.
The seven best growth stocks to buy below have what it takes to prosper in these changing market conditions.
Visa (NYSE:V), in some ways, is the perfect growth stock. Almost every year, the company effortlessly grows both its revenue and earnings per share at a double-digit clip. Visa effectively has a duopoly with key rival Mastercard (NYSE:MA) in the credit card business, ensuring that both have a favorable business environment with strong profitability and a profound network effect.
Visa has also benefitted from the rapid restart of global travel and tourism. That’s because it enjoys much higher profit margins on cross-border payments, which involve foreign exchange.
V stock trades at 27.3 times forward earnings, below its five-year average of 30.1. It’s a reasonable price for a company that is expected to grow both revenue and earnings at a double-digit annualized pace going forward.
Visa should also serve as a safe haven within the financial sector. As traders dump riskier regional bank shares, much of that capital should rotate into more secure options in the financials industry. Visa takes no credit risk on transactions and doesn’t have a complicated balance sheet to worry about. That should reassure investors.
Dutch Bros (BROS)
Dutch Bros (NYSE:BROS) is a small, rapidly growing coffee-shop chain that is popular with Gen Z. It has ditched large stores, instead choosing tiny locations designed to support take-out customers. In addition, Dutch Bros focuses on sweet, colorful beverages that look good on social media. However, one of the pitfalls of growth stocks is overly optimistic expectations, and Dutch Bros has fallen victim to this lately.
The company announced strong first-quarter results on May 9, with revenue growing nearly 30% year over year. However, this figure came in a hair short of expectations, and BROS stock plunged following the news. Adding insult to injury, a JPMorgan Chase analyst downgraded the stock on worries about the cost of new store growth, leading to a further decline in the share price.
These sorts of bumps in the road happen to young companies that are scaling up operations. But investors shouldn’t lose sight of the fact that Dutch Bros is still expected to grow revenue at around a 30% clip this year and next. And it opened another 45 stores in Q1, putting it well on its way toward management’s goal of opening 150 stores in 2023.
Dutch Bros has a fantastic concept that really resonates with younger consumers. And there is the potential to open thousands of additional locations over the next decade. BROS stock is down on a year-to-date basis following the post-earnings sell-off, giving investors another shot at this intriguing growth story.
Endava (NYSE:DAVA) is in a subsector of companies in the information technology outsourcing space. Essentially, these firms have huge teams of engineers, often based in emerging markets with lower wages, and they provide contract and specialty tech solutions to large enterprises.
If you’re a Fortune 500 company in a field such as insurance or media, let’s say, it probably doesn’t make sense to try to reinvent the wheel with your own coding teams. Instead they can hire a firm like Endava that provides tailored tech solutions at reasonable prices.
Endava has grown like a weed, with revenue rising from 217.6 million pounds in fiscal 2018 to an estimated $814.5 million pounds for the current year. Shares trade at less than 18 times cash flow, and analysts expect earnings growth of 19% this fiscal year and 17% in the following year.
As a group, IT outsourcers have gotten crushed since 2021 amid fears of a general slowdown. And Endava specifically has a large portion of its revenue base in the financial services and payments solutions industries. Right now, the market wants nothing to do with either of these groups. Yet, with DAVA stock down from a peak of more than $170 a share in 2021 to under $50 today, that is all more than accounted for in this fast-growing tech company.
EPAM Systems (EPAM)
While we’re on the topic of IT outsourcers, it’s time to mention EPAM Systems (NYSE:EPAM) as one of the best growth stocks to buy. It was one of the original companies to leverage the idea of labor arbitrage in the IT space, and shares rose from $13 in 2012 to a peak of nearly $700 in 2021. It’s been an incredible ride for longtime EPAM shareholders.
However, the firm’s reliance on Eastern European labor quickly became an issue when Russia invaded Ukraine in early 2022. More than half of the firm’s 58,000 workers came from Russia, Belarus and Ukraine at the start of the war in Ukraine. Investors understandably panicked, and EPAM shares collapsed, falling under $200 in short order.
But things weren’t as bad as they seemed for the company. EPAM has sped up hiring in other markets, such as Latin America and India, while reshuffling its workflows to meet its contractual obligations. Incredibly, despite the shock of the war in Ukraine, EPAM has still managed to post positive year-over-year revenue growth, and growth should reaccelerate in the back half of 2023.
EPAM stock was highly valued, at one point hitting a P/E ratio of above 90 prior to the invasion of Ukraine. Now, shares are selling at 32.4 times earnings. Expect that valuation multiple — and stock price — to pick back up once the company returns to reporting double-digit year-over-year revenue growth later this year.
Qualcomm (NASDAQ:QCOM) is a one of the best growth stocks to buy that also currently falls into the value stock category. Shares of the telecom-focused semiconductor company are down 23% over the past year and trading less than 2% above their 52-week low.
Behind the stock’s slide is slumping demand for consumer electronics devices and the fact that the 5G rollout story hasn’t materialized in the way the bulls had hoped.
The company reported its fiscal second-quarter results on May 3. Overall revenue fell 17% year over year amid continued weakness in handset chip sales, which were also down 17% from a year ago. However, Qualcomm has other irons in the fire, including its fast-growing automotive market chip business, with sales up 20% year over year in fiscal Q2.
Qualcomm is also an emerging leader in the artificial intelligence race, with its AI chips topping Nvidia (NASDAQ:NVDA) in some recent tests.
All this speaks to a company that will be in fine shape once the phone market picks back up. Meanwhile, the stock is going for less than 13 times forward earnings while offering a 3.1% dividend yield.
Datadog (NASDAQ:DDOG) provides cloud monitoring and security functions via software-as-a-service solutions. Datadog’s appeal lies in its all-in-one platform. In other words, the company’s clients can monitor and secure their servers, workflows, databases and other IT hardware from one central location. In contrast, traditional solutions are compartmentalized, creating potential blind spots and vulnerabilities. Having all these functions in one place makes it easier for firms’ IT professionals to look at everything simultaneously.
Datadog has been one of the industry’s most remarkable success stories. The company grew revenue from a modest $101 million in 2017 to $1.7 billion in fiscal year 2022, with revenue expected to hit $2.1 billion this year. And analysts expect the company to keep growing at around 25% per year going forward.
Datadog is already profitable, which sets it ahead of many of its software-as-a-service company peers. While Shares have rallied 20% so far this year, they are still down 19% over the past 12 months and offer good value today.
Unity Software (U)
Unity Software (NYSE:U) is the operator of a leading graphics engine. Developers use the company’s graphics engine to design and run video games. While Unity was created to power the video gaming ecosystem, it has broadened its reach in recent years into video animation, architecture and e-commerce.
Unity, along with its key rival, Unreal, control the majority of the video-game-engine market. It’s difficult for other companies to take share from Unity as many developers have become accustomed to using its platform. Unity’s claim to fame is that its engine works seamlessly across platforms. A developer can build a game for, say, PCs, and then easily release that same game for use in conjunction with consoles, mobile, and even virtual/augmented reality.
For years, the knock on Unity was its excessive spending and unprofitability. But after a series of cost cuts, Unity has reached profitability. Analysts are forecasting full-year revenue growth of 54% this year and for EPS to swing from a loss of 39 cents per share to a profit of 35 cents.
On the date of publication, Ian Bezek held a long position in EPAM, DAVA, U, V, and QCOM stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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