3 Growth Stocks to Buy That Could Be Massive Long-Term Winners

Up 66%, 15%, and 24% year to date, respectively, Shopify (SHOP), Kinsale Capital (KNSL), and Celsius (CELH) may have investors wondering if they have missed their opportunities to buy. Certainly none of them are “cheap” by traditional valuation methods.

So why exactly are they interesting?

Simply put — each company thoroughly dominates its niche.

And while Shopify’s market may be massive comparatively speaking, all three of these growth stocks could offer multibagger potential, despite their premium valuations.

1. Shopify
While Shopify’s decision to sell most of its Shopify Fulfillment Network and recently acquired logistics company Deliverr to Flexport seems like a white flag waved in the direction of Amazon, it may prove to be a blessing in disguise for shareholders. Somewhat ceding defeat to Amazon’s massive logistical network, Shopify will receive a 13% equity stake in Flexport — and will turn its focus back to its “main quest” of building the best e-commerce platform, as CEO Tobi Lütke explained it.

For investors, however, this sale could bring many of the same advantages as a spinoff. While this is not a traditional spinoff, it acts as one for Shopify, even though Flexport will not immediately become publicly traded.

What are these benefits?

First, Shopify’s margins should improve over time. Selling the lower-margin logistics business should make the company’s financial statements more digestible for the market — giving it the potential for a steadier valuation should it achieve stable margins.

Second, Shopify removes the need to continue funding the potentially capital-intensive unit — and eliminates the temptation to pursue additional logistics-related acquisitions. The $2.1 billion Shopify spent to buy Deliverr in 2022 shows just how fast it could go through its nearly $5 billion in cash if it tried to square off with Amazon and other shipping behemoths.

Finally, Shopify can now place 100% of its focus on the part of its company that has consistently beaten Amazon — arming entrepreneurs with the tools needed to build better businesses.

This renewed focus on its core mission seemed to resonate with the market, despite the potential for $1.5 billion in impairment from the logistics sale.

Given that the stock trades at 13 times sales, investors should be cautious with Shopify and consider building any position in it gradually over time. However, despite this premium valuation, the company’s rollout of its international-focused markets pro offering should make it a lock to be a larger company 10 years from now.

Today, cross-border sales only account for 15% of Shopify’s gross merchandise volume, so the company has a massive growth runway internationally that could make it a long-term winner from here.

2. Kinsale Capital
Operating as the only publicly traded pure-play excess and surplus (E&S) insurer, Kinsale Capital underwrites small and hard-to-assess risks. That niche-within-a-niche focus helped Kinsale maintain a best-in-class combined ratio (losses plus expenses) of 80.6% between 2020 and 2022.

Combined ratios add an insurer’s incurred losses and operating expenses together and compare them to the premiums written. A percentage below 100% indicates underwriting profitability. Highlighting how impressive Kinsale’s 80.6% mark really is, its peers’ averaged combined ratios were 96.7% over the same time. Additionally, the company grew its net premiums written by 40% annually over that time — a growth rate four times what its competitors averaged.

Led by this unmatched combination of profitability and growth, Kinsale’s share price has risen nearly sixfold over the last five years.

Furthermore, though two of the top three costliest natural disasters ever occurred within the last two years, the company has delivered record profitability — despite maintaining a conservative strategy on reserves for future claims.

Riding this strong profitability, Kinsale has built a $2.4 billion investment portfolio that saw a 128% increase in investment income compared to last year. It generated investment income of over $21 million in the first quarter of 2023, and may reach the $100 million mark for the full year — an impressive feat for the $7.5 billion company.

Trading at a price-to-earnings ratio of 38, Kinsale is near its historical average, valuation-wise. Despite maintaining a premium valuation to the market, Kinsale has outperformed — proving the adage that an excellent business at a fair price is better than a fair business at an excellent price.

3. Celsius
Growing sales by 95% and gross profits by 111% in Q1, better-for-you energy drink company Celsius continued to prove why it is one of the most exciting growth stocks on the market. Powered by its proprietary Metaplus blend, its metabolism-boosting energy drinks and mixable packets have rapidly made it the third-largest energy drink brand in the U.S., with a 7.5% market share.

Up from a 3.7% share a year ago, the company now only trails Red Bull and Monster domestically. Better yet, its major distribution partnership with Pepsi positions it to continue rapidly gaining share — especially considering that its beverages have more health appeal than those of its two larger rivals.

Highlighting just how fast this partnership is helping Celsius grow market share, in the four-week period that ended March 26, its sales jumped 129% year over year, while the broader energy drink market grew by just 12%.

Thanks to this tremendous growth, Celsius’ stock price is near its all-time peak.

Trading at a price-to-sales ratio of 12.6, Celsius commands a frightening valuation. Even if it matured to post net profit margins of 20% as Monster does, it would be trading at 65 times earnings.

However, it has averaged 75% annualized sales growth in its years as a publicly traded company — a metric that is surprisingly increasing over time — and its track record of outgrowing its valuations makes it a fun candidate to add to your portfolio.

— Josh Kohn-Lindquist

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Source: The Motley Fool