As a growth stock investor, I’m obviously interested in the market’s fastest growing stocks. But what exactly does that mean? Paul Goodwin, who’s one of my Cabot partners in crime, came up with the acronym SNaC a few years ago to describe our growth methodology from a 10,000-foot view.
The S stands for Story. I want a great growth story, which means something that can persist and, ideally, offers a revolutionary product or service that changes how millions of people work, live or are entertained. I’m really looking for companies with no visible ceiling on their growth potential, to paraphrase the late, great, Tom Phelps.
The N stands for Numbers. I want great sales and earnings growth in recent quarters, with buoyant profit margins, and I’m biased toward companies that have great earnings estimates, giving me confidence that these will remain among the fastest growing stocks in the market.
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And the C stands for Chart. I want stocks that are going up, both in absolute terms (the price is trending higher) and relative to the market (I use relative performance (RP) lines to determine if a stock is outperforming the major indexes).
For Cabot Growth Investor stocks, I want to see all three—story, numbers and chart—line up (along with a healthy market) before buying. Just one or two doesn’t do it for me.
Despite that, I regularly get questions from subscribers that go something like this: “I know you like strong charts, but just fundamentally, what are your favorite stocks?” And after I give them my explanation that I demand a good chart, they follow up with “Yes, yes, I know, makes sense—but just fundamentally, what are some companies you like that could do well down the road?”
What they’re really asking is: Among the market’s fastest growing stocks, which ones have you researched that you think could eventually do even better—names that are worth keeping an eye on even if they’re not yet ready for prime time? You could call them cocktail party stocks: great, enticing fundamental stories that grab your attention and won’t let go.
So I thought you’d be interested to know three of the fastest growing stocks that are on my “back burner”—their charts aren’t good enough for me, but their stories and numbers are so good that a big positive event (like a major earnings gap) could put them on my Watch List. As much as I demand a healthy chart, it’s good to have a handful of these fast-growing stocks in your back pocket, especially during earnings season, so you’re ready to pounce if the chart improves quickly.
Fastest Growing Stock #1: Mobileye (MBLY)
Mobileye is one because of its leadership position in the technology for semi-autonomous (and eventually, fully autonomous) driving. There’s competition, of course, including from one of last year’s fastest growing stocks, Nvidia (NVDA), whose high-powered chips offer another approach to autonomous driving. But Mobileye’s camera-based approach to these tasks has proven reliable, it has partnerships with most of the major carmakers in the world and recently announced a deal with Intel and BMW to test autonomous cars in the second half of this year. Many analysts have upgraded their ratings this year, with some anticipating 40% annual growth through 2020 (some see earnings up 46% this year and 53% in 2018). MBLY has made no real progress since coming public in 2014, and while it’s off its lows, I’d need to see a big earnings gap (the quarterly report is due February 22) into the low 50s to even consider taking a position, but given the firm’s story and growth, I’m not ruling it out!
Fastest Growing Stock #2: Five Below (FIVE)
Five Below is probably my favorite cookie-cutter story in the market—the firm’s dollar stores (all sorts of apparel, goods, party supplies, candy and the like for teens and pre-teens) have some of the best store economics I’ve ever seen, with new stores paying back their initial investment within a year, which has allowed the company to expand rapidly, boosting its store count by 15% to 20% annually; at the end of October, it had 517 stores, but the top brass believes there’s room for 2,000 locations in the U.S. Management is also targeting 20% annual sales and earnings growth through 2020 (recent quarters have been right around those figures), and I think growth will remain solid well beyond that. The problem is that retail stocks have been horrible due to softening same-store sales, which FIVE hasn’t been able to avoid, and worries about a potential tax reform plan this year that could disallow deductions for the costs of imports. FIVE is mired 27% below its high from last year, and moreover, hasn’t made any net progress in about three years. Successful cookie-cutter stocks have a long history of producing great gains in the stock market, and some day, I think Five Below could join those ranks.
Fastest Growing Stock #3: Dexcom (DXCM)
The third stock I’m keeping an eye on is Dexcom, which appears to have a revolutionary continuous glucose monitoring technology, an industry that’s gaining in acceptance due to the advantages of frequent monitoring (many diabetics are outside their healthy glucose levels 70% of the time, which isn’t picked up by intermittent monitoring). The firm’s latest CGM systems (which can be used with your smartphone) are so accurate they’ve been approved by Uncle Sam as a replacement for finger stick testing, and will also be reimbursed by Medicare and Medicaid, a huge advantage over its competition. Dexcom has been losing money for a while as it invests in sales, studies and manufacturing, but revenues grew 42% last year and should expand another 30%-plus in 2017 with huge recurring revenue going forward. The stock topped back in August 2015 and has had a couple of huge drops since then, but it also had a great leap in January after receiving “finger stick” approved. As the leader in its field, there’s no reason the company couldn’t increase its user base many-fold in the years ahead as people (and insurance companies) move toward improved glucose monitoring, which, in the long run, decreases adverse symptoms, saving money.
So there you go: Three of the market’s fastest growing stocks that also have unique, long-lasting growth stories. While already fast growing, these three stocks could turn into even bigger winners … if big investors eventually take a shine to them. Let’s see if that happens in the weeks and months ahead.
For more updates on these stocks, but more importantly, to get the full list of stocks I hold in my Cabot Growth Investor portfolio consider taking a trial subscription to my advisory. We’ve been providing investors with a profitable advice since 1970.
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