Two years ago, Bank of America/Merrill Lynch released its findings of a 90-year analysis comparing growth and value stocks. While the report showed that value stocks have handily outperformed growth stocks on an annual basis (17% versus 12.6%), the tables have turned over the past decade, with the low interest-rate environment providing an extra boost to growth stocks. Given the recent market swoon, certain growth stocks may be ripe for the picking.
With this in mind, we asked three of our fool.com contributors to name one growth stock they believe investors should consider buying right now. Making the list were cancer-focused drug developer Exelixis (NASDAQ:EXEL), software-as-a-service provider to the wellness industry Mindbody (NASDAQ:MB), and payment solutions provider Square (NYSE:SQ).
A 30% compound annual sales growth rate through 2021? Yes, please
Sean Williams (Exelixis): I may pound the table on Exelixis a lot, but I believe I have some pretty good reasons to do so.
In recent months, Exelixis stock has been pressured on the idea that Bristol-Myers Squibb and its immunotherapy combo of Opdivo and Yervoy would eat into the company's market share in first-line renal cell carcinoma (RCC). It surprised a lot of folks on Wall Street just how well Bristol-Myers' combo therapy did in first-line RCC.
However, many of these fears have proven overblown -- at least so far. In Exelixis' most recent quarterly report, the company recorded 69% net product sales growth, which was driven almost entirely by Cabometyx. For those who may not recall, Cabometyx was the first drug to deliver the "trifecta" in second-line RCC of a statistically significant improvement in median overall survival, progression-free survival, and objective response rate. Having beaten Bristol-Myers to pharmacy shelves in first-line RCC, it doesn't appear that Cabometyx will cede much of its market share.
Exelixis' lead drug is also less than two months away from an expected label expansion into advanced hepatocellular carcinoma (HCC). The HCC market is a bit smaller than RCC, but it nevertheless should give Exelixis an opportunity to grow sales and profitability after Cabometyx easily met its primary endpoint in the phase 3 Celestial trial.
Ultimately, we're talking about a biotech company capable of a compound annual growth rate of 30% through 2021 that, if its share price were to remain stagnant, would be valued at just 10 times projected 2021 earnings per share. It's not often that a company can be considered both a growth and value stock, but that's exactly what investors get with Exelixis.
High growth at a value price
Brian Feroldi (Mindbody): Yoga has become an increasingly popular exercise in America. Meeting the demand has turned into a very big business. The North America Studio Alliance estimated that spending on activities related to yoga grew from $10.3 billion in 2012 to $16.8 billion in 2016. The popularity of the fitness program has caused scores of small studios to pop up everywhere.
A hidden winner in the yoga boom is a software-as-a-service business called Mindbody, which provides its customers with all of the tools that they need to run a successful operation. Tasks such as scheduling, marketing, and payments can all be handled through Mindbody's platform in a cost-effective manner.
The allure of Mindbody's offering has already convinced more than 68,000 customers to sign up. That number might sound big, but the company is already looking beyond yoga and has started to target the larger fitness and beauty industries. The company estimates that there are more than 300,000 potential customers in its target markets, so the opportunity ahead is still substantial. What's more, Mindbody has a history of introducing new tools that convince its existing customers to spend more on the platform.
Mindbody should be able to continue to grow its revenue at a greater than 20% rate for the foreseeable future as it continues to win new customers and roll out new features. Meanwhile, Mindbody's stock has been heading in reverse in part because of the marketwide sell-off. With shares currently trading more than 40% below their 52-week high, I think right now is a great time to buy this growth stock at a value price.
Reaping rewards from the revolution
Keith Speights (Square): You could focus on the short term. If you do, the departure of Square's CFO to become CEO of NextDoor might worry you. Square's lower-than-expected Q4 earnings guidance could be concerning as well. So could the stock's steep valuation. Even after a significant pullback, Square's shares still trade at a whopping 94 times expected earnings. But investors should focus on the long term.
We're in the midst of a financial revolution as society transitions away from cash to digital payments. Square is positioned as a key player in this revolution. Customers love the ease of use of its products and how easy Square is to work with as a company. This makes Square an attractive partner to go to for other products and services. And the company is rapidly adding them to its lineup.
Square thinks that it has tapped less than 3% of the addressable market in the U.S. The company should be able to capture more of this market by selling more products and services to existing customers, moving upmarket to larger customers, and making strategic acquisitions.
Even better, though, the global market is at least six times larger than the U.S. market. This gives Square a tremendous opportunity for growth. With momentum already picking up in Australia, Canada, Japan, and the United Kingdom -- and more markets to come -- Square looks like a great long-term growth stock.