It’s been quite the journey for the investment community since this decade began. After four consecutive years of the major stock indexes trading off bear and bull markets, optimists now look to be in clear control.
These swings have been especially pronounced in the growth stock-fueled Nasdaq Composite (^IXIC). Following the loss of 33% of its value during the 2022 bear market, the Nasdaq Composite has soared 57% since the beginning of 2023 and firmly entered a new bull market.
However, a majority of the Nasdaq’s gains have come courtesy of the “Magnificent Seven,” which means bargains can still be found among growth stocks. Long-term-minded investors simply have to be willing to seek them out.
What follows are four exceptional growth stocks you’ll regret not buying in the new Nasdaq bull market.
Visa
The first high-octane growth stock that’s historically been a genius buy during any pullback, and is an incredibly attractive stock to own in the young Nasdaq bull market, is payment processor Visa (V).
As a multiyear shareholder of leading payment facilitator Visa, the only bad thing I can say about this company is that it’s cyclical. Downturns in the U.S. economy are normal and inevitable. When the next recession arises, consumer and enterprise spending would be expected to decline, which would hamper Visa’s ability to collect fees from merchants.
The other side to this coin is that the U.S. economy spends a considerably longer period expanding than it does contracting. While there have been two periods of growth that surpassed 10 years since the end of World War II, none of the 12 recessions over the last 78 years have surpassed 18 months in length. Visa is in pole position to benefit from lengthy periods of economic expansion.
It’s a company taking advantage of growth opportunities in developed and emerging markets, as well. For example, it’s the overwhelming market share leader in credit card network purchase volume in the U.S. (the largest market for consumption globally). It also has more than enough capital and a substantial runway to organically expand its payment infrastructure into underbanked emerging markets (e.g., Southeastern Asia, Africa, and the Middle East), or to buy its way into higher-growth regions, such as it did in 2016 when it acquired Visa Europe. Cross-border volume surged by 16% from the prior-year period in the December-ended quarter.
As I’ve previously pointed out, management’s decision to shun lending is a key reason Visa’s profit margin has remained above 50%. Although some of its payment-processing peers act as lenders, doing so exposes these companies to potential credit delinquencies and loan losses when recessions crop up. Visa doesn’t have to worry about setting capital aside since it’s not a lender.
Visa’s forward price-to-earnings (P/E) ratio of 24.7 represents a 15% discount to its trailing-five-year forward-earnings multiple.
PubMatic
A second exceptional growth stock you’ll be kicking yourself for not adding to your portfolio with the Nasdaq stretching its proverbial legs in a new bull market is adtech company PubMatic (PUBM). PubMatic’s cloud-based programmatic ad platform helps publishing companies sell their digital display space.
Similar to Visa, the health of the U.S. economy tends to be the biggest headwind for advertising companies like PubMatic. Businesses aren’t shy about paring back their ad budgets at the first sign of trouble. But as noted, the U.S. economy spends far more time growing than slowing. That’s excellent news for opportunistic long-term investors in ad-driven stocks.
This should be a particularly good year for ad companies thanks to U.S. elections. Based on estimates from GroupM, political ad spending is expected to rise by 31% in 2024 to $15.9 billion from the prior election cycle in 2020. Since more ad dollars than ever have shifted to digital channels, which is what PubMatic specializes in, the company is ideally positioned to benefit from this uptick in political ad spend.
Another reason investors can expect PubMatic to outperform in the years to come is because of management’s (in hindsight) wise decision to build out its own cloud-based programmatic ad platform. Though it would have been quicker and cheaper to rely on a third-party provider, the choice to develop its own infrastructure means it’ll be keeping more of its revenue as its business scales. Long story short, it should lead to a superior operating margin.
Despite being a small-cap company, PubMatic is swimming in cash. It closed out 2023 with $175.3 million in cash with no debt, and it repurchased more than $59 million worth of its common stock last year. If and when a recession does take shape, PubMatic’s balance sheet is ready.
Warner Bros. Discovery
The third magnificent growth stock that’s begging to be bought with the Nasdaq in the early stages of a bull market is media titan Warner Bros. Discovery (WBD). Though its sales growth doesn’t meet the typical definition of a “growth stock,” Wall Street’s expected annualized earnings growth of 20% for the company through 2028 certainly puts this legacy media giant on the map.
Not to sound like a broken record, but the economy matters. A weaker climate for ad spending has weighed heavily on Warner Bros. Discovery’s legacy TV segment. Further, its pivot to streaming has led to sizable operating losses for the company’s direct-to-consumer (DTC) operations.
Thankfully, PubMatic isn’t the only company set to benefit from a sizable uptick in political ad spending this year. While cord-cutting has proved challenging for legacy media companies, the election cycle should provide a nice boost to Warner Bros. Discovery’s sales and bottom line in 2024.
What’s arguably more important is that the company’s DTC division sports substantial pricing power. The ability to raise monthly prices on subscribers, coupled with mindful reductions to selling, general, and administrative expenses, is Warner Bros. Discovery’s recipe to eventually reach recurring profitability for its DTC segment. Despite raising subscription prices, global streaming subscribers and average revenue per user grew modestly last year, inclusive of acquisitions.
Don’t overlook this company’s ability to generate free cash flow (FCF), either. Although the writer’s strike did materially reduce expenses last year, Warner Bros. recognized an 86% year-over-year increase in reported FCF. Generating plenty of cash from its operations should help the company tackle its debt load.
Warner Bros. Discovery’s stock and operating performance won’t turn on a dime. However, the puzzle pieces are in place for investors to generate big-time returns over the long run.
AstraZeneca
The fourth exceptional growth stock you’ll regret not buying in the new Nasdaq bull market is none other than pharmaceutical juggernaut AstraZeneca (AZN).
The big headwind drug developers have to contend with is the finite period of sales exclusivity for their novel therapies. Generic drugmakers are seemingly always waiting in the wings to pounce when patent exclusivity runs out on top-selling drugs. While AstraZeneca struggled with the patent cliff in decade’s past, the company’s vast novel drug portfolio is now firing on all cylinders.
Specifically, three operating segments have AstraZeneca humming along like a well-oiled machine: oncology, cardiovascular, renal, and metabolism (CVRM), and rare disease, which delivered respective currency-neutral sales growth last year of 20%, 18%, and 12%.
AstraZeneca’s cancer-drug division has four blockbuster therapies that are benefiting from improved cancer-screening diagnostics, strong pricing power, and label expansion opportunities. In particular, sales of monoclonal antibody Imfinzi skyrocketed by 55% on a constant-currency basis to $4.24 billion last year.
In CVRM, next-generation type 2 diabetes therapy Farxiga has done most of the heavy lifting. Sales jumped by 39% on a currency-neutral basis in 2023 to $5.96 billion. In the process, Farxiga unseated non-small-cell lung carcinoma drug Tagrisso as AstraZeneca’s top-selling drug.
Finally, rare disease therapies have been a bright spot. When AstraZeneca acquired Alexion Pharmaceuticals in July 2021, it got its hands on blockbuster ultrarare-disease drug Soliris and its next-gen replacement Ultomiris. Because Alexion developed a replacement for Soliris, AstraZeneca will be able to hang onto more of its cash flow without fear of generic competition.
A forward P/E ratio of 13.5 seems more than fair for a rock-solid drugmaker that’s expected to grow its earnings by an annual average of 13.2% through 2028.
— Sean Williams
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Source: The Motley Fool