Fast-growing companies typically trade at a premium valuation as investors tend to be willing to pay up for that growth.
With the market trading very close to bear market territory, many of these high-growth names are trading below their intrinsic value as investors seek out areas they consider to be safer.
This could be an opportunity for long-term investors to acquire high-quality stocks with strong growth at a much more reasonable price.
This discussion will highlight two stocks that meet the following criteria:
- Total revenue growth rate of at least 10% for the past five years.
- Earnings per share without nonrecurring items growth rate of at least 10% for the past five years.
- Currently trades at a discount of at least 37% to the GF Value.
- Has a GF Score of at least 90 out of 100.
Intuit
The first name to consider is Intuit Inc. (INTU, Financial), which provides businesses with financial management solutions. The company gears its products, such as QuickBooks and TurboTax, towards accounting professionals, small businesses and consumers. Small businesses and self-employed customers account for half of sales, with consumers contributing the majority of the remainder. Intuit is valued at $109 billion and generated revenue approaching $10 billion in fiscal 2021.
The last five years have seen impressive growth rates for the company. Revenue grew by 15% annually with earnings per share without NRI higher by 20.5% over this period. Bottom-line performance has outpaced top-line gains as Intuit has become much more efficient at extracting profit from sales. The company’s net profit margin improved 540 basis points from 22.2% in fiscal year 2017 to fiscal year 2022.
Intuit looks to continue to build on recent results as both revenue and earnings per share are projected to grow 20.2% and 17.7% over the next three to five years, according to GuruFocus.
Shares of the company appear to be trading at a sizeable discount to their intrinsic value according to the GF Value Line.
Intuit is trading at $384.27. With a GF Value of $525.22, the stock has a price-to-GF Value ratio of 0.73. Reaching the GF Value would result in a nearly 37% gain in the share price. Intuit is rated as modestly undervalued.
The GF Score seen at the top of each stock’s summary page reflects a combination of profitability, growth, financial strength, momentum and valuation. Companies with higher GF Scores have outperformed those with lower scores over the long term.
Aside from a strong showing in valuation, Intuit scores a 9 out of 10 for profitability, where it outranks the vast majority of its peers on nearly every metric, and a 9 out of 10 on growth, where both past and future revenue growth rates outdistance much of the competition.
These scores help drive a GF Score of 92 out of 100.
Intuitive Surgical
The second stock for consideration is Intuitive Surgical Inc. (ISRG, Financial), a cutting-edge medical device company. The company’s products, which include the da Vinci Surgical System and the Ion endoluminal system, allow physicians and health care providers to increase the quality of minimally invasive care through the use of robotics. These products are used for a variety of procedures, including prostate removal and lung biopsies. Intuitive Surgical has a market capitalization of $73 billion and generates annual revenue of $5.7 billion.
Intuitive Surgical’s products have made minimally invasive procedures much easier for both the physician and the patient, which has led to high levels of demand. Revenue has improved 15% annually over the last half-decade, while earnings per share without NRI have gained 17%. The net profit margin has declined 140 basis points since 2017, but Intuitive Surgical has overcome this slight decline by generating higher sales.
GuruFocus expects double-digit gains to continue over the next three to five years. For this period, Intuitive Surgical is projected to see 14% revenue and 11.6% earnings growth.
Intuitive Surgical looks to be very mispriced according to the GF Value Line.
With a recent trading price of $202.80 and a GF Value of $308.89, Intuitive Surgical has a price-to-GF Value ratio of 0.66. Intuitive Surgical could return 52% from current levels if it were to reach the GF Value.
Intuitive Surgical receives very high marks in almost all of the categories that factor into the GF Score. Financial strength, profitability and growth all receive a perfect 10 out of 10 as the company largely outperforms its peer group on nearly every metric. This is a major reason why Intuitive Surgical has a GF Score of 96 out of 100.
Final thoughts
High-growth names have fallen out of favor as the market has headed toward bear market territory. This has brought down the valuations of many names that have previously enjoyed a premium valuation. For investors looking to acquire these types of stocks at a discount and have a long-term horizon, now could be a good time to consider Intuit and Intuitive Surgical.
