While risk-averse investors tend to opt for stable investments in value stocks, risk seekers try to find growth stocks. A couple things that growth stocks provide in abundance are excitement and volatility. The sometimes dramatic daily swings in price are enough to get the blood pumping. Such stocks have the potential to bring large benefits, but they also carry significant risk.
Among these risky growth stocks, there are still a number of success stories: Apple (AAPL), in particular, stands out as a striking example. Apple has been showing mind-boggling growth and is likely to keep its stride for some time. While well-known growth stocks like Apple are closely monitored, other, equally interesting, companies sometimes slip by unnoticed. Many of these overlooked companies carry enormous potential.
This article therefore has endeavored to provide a comprehensive analysis of a few of these companies that are currently showing the most potential. This analysis aims to balance a desire for the adrenaline-pumping excitement of growth stocks with some strong basic analysis. This piece includes analyses of three stocks, each from different sectors, which have massive potential and strong growth prospects. The choice to include these particular companies has been based on past performance as well as their future business prospects. A deeper look at earnings growth suggests, in all cases, an Apple-like sustainable growth potential.
The first stock, which I think holds vast potential, is a health care producer. Allergan operates in many areas of the health care sector. Some of the products offered by the company are silicone breast implants, Botox and Latisse eyelash thickener. The country's appetite for fashion is only going to go up and, especially within the aging population; Allergan products have a vast market. In fact, Allergan is currently the leader in the breast European breast implants market. However, the economic crisis in Europe poses a potential threat to future success, especially since companies have begun using aggressive techniques to steal market shares. In one recent case, one of the top five manufacturers of implants, Poly Implant Prothese, was banned due to hazardous implants, which has given the companies an opportunity to capture a higher market share.
In addition, Allergan has a very strong research and development department. It invests heavily in R&D in order to innovate constantly, thereby staying ahead of the competition. This company also has only a small amount of debt (less than $1 billion) but hefty cash reserves ($2.6 billion). Allergan has a small payout ratio of just six percent, with most of the capital reserved for further investments. Operating cash flows for the most recent year were $1.15 billion, while levered cash flows stood at $911 million.
Allergan has a strong presence in the American domestic market as one of the biggest Botox manufacturers in the country. They have also seen strong EPS growth, with analysts suggesting that this positive trend will continue. Analysts expect the EPS to grow at a rate of 15 percent per year over the next five years. This sector has strong growth potential, and a growth rate between 10 to 15 percent is very realistic. With such positive numbers, I expect Allergan to continue its growth to yield even better results in the future.
Noble Corp. (NE):
The second stock that I believe demonstrates potential for strong future growth is Noble Corp, an offshore driller that operates mainly through subsidiaries. It currently has 79 offshore drilling units and operations all over the world. Rising oil prices and increased demand will certainly play a crucial role in increasing revenues and earnings. As economic conditions start to improve, the demand for oil will surely increase. Encouraging manufacturing reports from China has already stimulated the market, which consequently looks to be recovering. Noble has already been in operation for over 91 years, which only proves the strength of the management team that has made this company the world's largest offshore driller.
Noble has strong operating cash flows of $1.06 billion and a manageable payout ratio of 33 percent. This company also follows a conservative financial plan to meet the upcoming challenges in the energy market. Noble has minimal debt that amounts to just over $4 billion and current cash reserves of $275 million.
Noble already exhibits strong revenue growth rates of 15 percent, as well as a year-on-year growth of 43.1 percent. This company has a neat gross profit margin of 48.80 percent and operating profit margin of 17.80 percent. Net cash flows for the company increased to $432 million. There was an increase of 195.95 percent in the net income, which went from $54 million to $159 million. Analysts expect these earnings to double by next year. A predicted long-term annual earnings growth rate of 12.75 percent is a fair assessment for this company.
Dorman Products (DORM):
While the two previously mentioned companies certainly show incredible potential, Dorman remains my favorite of the three. Dorman Products is the original dealer for replacement vehicle components. Dorman is a small cap company with huge potential for growth. In fact, according to the most recent earnings announcements, their revenues have increased by 14 percent, largely due to a substantial increase in demand for their products. Net income for the company increased by 25 percent, reaching $16 million from $12 million in the previous quarter. There is strong demand for Dorman products within a well-established market. Furthermore, the automobile market is recovering, which can only further improve the market for Dorman Products.
Moreover, the Dorman Products capital structure suffers from no long-term debt, giving the company an enormous advantage over its competitors. For a growing company, sometimes debt can cripple growth, but a lack of debt means that Dorman is highly unlikely to face such problems.
In the second quarter, Dorman reported a gross profit margin of 37.5 percent and operating cash flows of $14 million. Dorman also has cash reserves of $59.81 million, which translates into cash of $1.65 per share. Dorman Products earnings should keep growing at the rate of 15.74 percent for the next year and at 14.54 percent for 2014.
This business sector has high potential for growth and Dorman stands to gain from these opportunities. Ultimately, with such astoundingly positive predicted growth habits, investment in Dorman Products is clearly a good opportunity to turn some handsome profits.
About the author:Efsinvestment.com website offers simple do-it-yourself type of investment ideas. You can download excel files that can easily calculate the Fair Value of a stock, along with O-Metrix score and Margin of Safety.
Investment philosophy is to first determine the maximum loss, and invest accordingly. Like many value investors, we prefer to invest in stocks with the highest dividend yields, and highest EPS growth potentials. Telecommunication and energy stocks in emerging markets are among the favorites.
Based on extensive quantitative analysis, in any market, going short is risky. Statistical analysis shows that technical indicators work only if they are strong enough to convince the majority of the investors. Do not buy a stock at the top, do not sell a stock at the dip.