Despite May’s surprisingly strong jobs report, the U.S. is now officially in a recession. Analysts are slashing estimates for corporate sales and profit growth—a highly prized quality these days.
Yet investors are rewarding stocks that look poised to grow at above average rates over the next three to five years. Stocks with the highest long-term growth rates—in the top 25%—outperformed other stocks in their industry in eight of the 11 sectors in the S&P 500 (.SPX) this year, through June 5, according to Jim Paulsen, chief investment strategist at Leuthold Group. Some of the biggest outperformance was in tech, health care, communication services, and real estate, according to his analysis.
Here are 11 stocks that passed a similar screen run by Barron’s, along with a brief profile of each. Growth estimates are based on analysts’ consensus estimates for earnings per share over the next three to five years, according to forecasts compiled by FactSet. We excluded stocks with negative returns this year, reasoning they lack strong momentum or faced company-specific challenges.
As a reminder, screens are only a starting point for further analysis.
Sector year-to-date returns: -26.3%
Top stock: Cabot Oil and Gas (COG)
Of the 25 stocks in the S&P 500 energy sector, Cabot is the only one with a positive return this year, gaining 18.7%, including dividends. The natural-gas producer also happens to have the highest estimated long-term growth rate at 35% annualized over the next three to five years.
Natural gas prices plunged 49% in the first quarter, but Cabot generated net income of $53.9 million or 14 cents per share and $50 million of free cash flow. The company says it’s committed to paying its dividend, recently yielding 2%.
Cabot actually benefits from lower oil prices. A large percentage of U.S. natural gas production comes as a byproduct of shale oil drilling. And producers have been shutting down their wells as oil prices slumped. That could means less natural gas supply, and higher prices.
The company isn’t forecasting earnings for 2021. But Cabot CEO Dan Dinges told analysts recently that the firm should be able to generate a free cash flow yield of more than 6% and return on capital of 20% at current gas prices, without adding to its debt ratio or increasing maintenance capital expenditures. Cabot’s balance sheet looks solid at 0.9 times net debt to trailing 12-month Ebitda (earnings before interest, taxes, depreciation, and amortization).
Sector year-to-date returns: -2.8%
Top stock: Newmont (NEM)
Shares of gold mining company Newmont have gained 27% this year, beating every other stock in the materials sector.
Newmont’s stock is a play on demand for gold—a traditional safe haven that has done well in times of crisis. However, the company’s production costs are low enough, at around $900 an ounce, that Newmont has a comfortable operating margin with gold at current prices around $1,700. The company’s long-term estimated growth rate is 31%.
Newmont operates 12 mines and two joint ventures, and recently acquired a large rival, Goldcorp, forming the world’s largest gold producer. Free cash flow was $611 million in the first quarter. CEO Tom Palmer said recently that Newmont has one of the strongest balance sheets in the sector with $3.7 billion of cash and total liquidity of $6.6 billion.
Newmont stock yields 1.8%. The company recently announced plans to increase its payout by 79%, taking its quarterly dividend to 25 cents a share, up from 14 cents.
Sector year-to-date returns: -8.4%
Top stock: Fastental (FAST)
Shares of industrial parts and tools supplier Fastenal are on a roll this year, gaining 17%. It isn’t the top stock in the industrials sector—the prize goes to Old Dominion Freight Line (ODFL) with a 34% return. But Fastenal has a much higher long-term growth rate, estimated at 19% over the next three to five years, according to consensus estimates for earnings per share.
Fastenal is one of the largest global parts and tools distributors, selling everything from cutting tools to storage and packaging power, transmission and motors. Analysts expect sales to climb 5.6% in 2021 to $5.8 billion. Earnings per share are expected to rise 10.3% to $1.46 per share. Many of the company’s end markets are under pressure, though the firm recently saw a surge in orders for personal protective equipment for health care workers. And there were some positives in the first quarter: The company said it signed 4,798 “industrial vending devices,” taking its installed base to 92,124. Daily sales through these devices grew at “a low double-digit pace in the first quarter,” the company said.
The stock isn’t liked on Wall Street. Of 11 analysts covering the stock, only two have Overweight or Buy ratings.
Nonetheless, the stock has been a winner, gaining an annualized 10.9% over the past five years, slightly edging the S&P 500.
Sector: Consumer Staples
Sector year-to-date returns: -4.6%
Top stock: Monster Beverage (MNST)
Energy drink maker Monster Beverage is having another banner year. Shares are up 13.7%. And the company has the highest long-term estimated growth in its sector, with earnings per share expected to rise at a 9% annualized rate over the next three to five years.
Other stocks in the sector have done better this year. Clorox (CLX), for instance, is up 30%. General Mills (GIS) has gained 16% and Kroger (KR) is ahead 13%. These are all companies benefiting from the safety-first trade—consumer stocking up on household items and investors buying stocks of companies expected to be durable during a recession.
But Monster has long been a strong performer based on above-average growth. Shares have gained an annualized 15% over the last five years, beating the S&P 500 by five percentage points and edging the sector by eight points, annualized. Monster said that sales in the first quarter increased 12.3% to about $1.1 billion from $946 million a year ago. Net income increased 6.6% to $279 million and earnings per share rose 8.2% to $0.52.
Sector: Health Care
Sector year-to-date returns: 1%
Top stock: DexCom (DXCM)
Analysts view DexCom as one of the fastest-growing companies in large-cap health care, expected to boost earnings per share by an annualized 39% over the next three to five years. The stock has surged 67% this year, making it one of the strongest performers in the sector.
DexCom makes blood-glucose monitoring devices for diabetes patients, and it’s expected to get a lift in sales as more patients move to remote-monitoring, avoiding hospital and clinics if possible. The company reported that first quarter revenue grew to $405 million, up 44% from last year. Regulators are removing some hurdles to remote monitoring and diagnostics, the DexCom expects to see an uptick in usage from increased telehealth initiatives.
One caveat: Shares look exorbitantly priced. The stock trades at 174 times estimated 2020 earnings of $2.09 a share. The shares look pricey on just about every valuation metric, including a steep price-to-sales ratio of 21.5 times.
Nonetheless, investors have been rewarded. The stock has gained an average 41.8% over the past five years, beating the S&P 500 by an annualized 32 percentage points. Analysts expect the company to boost sales by 23% next year and see earnings per share rising 42%.
Sector year-to-date returns: -15%
Top stock: MarketAxess Holdings (MKTX)
MarketAxess, an electronic trading platform for bonds and other fixed-income securities, has one of the biggest winners this year, gaining 31%. Long-term earnings growth is expected to be 18.3% over the next three to five years, landing near the top of the sector.
Bond trading has traditionally been opaque, conducted “over the counter” by traders. Backed by Wall Street firms, however, MarketAxess created an electronic trading platform that appears to be thriving with 2,000 “buy-side” clients on its platform and over 250 bond dealers. The company reported record trading volume in the first quarter with revenue of $169 million, up 36% from a year ago, and earnings of $1.96 a share, up 41%.
This isn’t a cheap stock, trading at 70 times estimated 2020 earnings. Nonetheless, demand for fixed income products keeps expanding with the growth of exchange-traded funds and other institutional purchasers. The stock has gained an annualized 41.7% over the past five years.
Sector: Information Technology
Sector year-to-date returns: 9.2%
Top stock: ServiceNow (NOW)
Robust profit growth powered ServiceNow, an enterprise subscription-software company, to the top of our screen. Shares are up 31% this year, and analysts expect sales to climb at a 30% annualized rate.
A corporate workflow and data analytics platform, ServiceNow is growing steadily. Analysts expect sales to rise about 20% in 2021, reaching $5.4 billion. Earnings per share are expected to jump to $5.37 a share from $4.23 in 2020.
ServiceNow’s multiple reflects its growth—and then some: The stock trades at 92 times estimated 2020 earnings and 72 times 2021 earnings. But the stock has gained an annualized 37% over the past five years, despite a multiple that has remained steep. The stock has already blown past most analysts’ price targets, implying limited upside in the near-term, though the company has a long history of exceeding analysts’ quarterly sales and profit estimates, propelling the shares higher.
Sector: Communication Services
Sector year-to-date returns: 2%
Top stock: Netflix (NFLX)
Netflix has surged past many giants in this sector, with share performance of 30% this year. It also has strong long-term growth in earnings per share, estimated at 40% annualized for the next three to five years.
The story, of course, is that millions of consumers are more likely to stay home in a more socially distanced world, consuming more entertainment in their living rooms rather than go to a movie theater or live show. Netflix faces widening competition from every other giant media company, including AT&T (T), Walt Disney (DIS) and Comcast (CMCSA), which all recently launched streaming services. Netflix’s content costs are rising as it pays more to license TV shows and other content, and ramps up its budget for original production.
But Netflix has long defied short sellers predicting the stock’s demise. The company has only missed quarterly targets for earnings per share four times since 2015. And Netflix should continue to have pricing power, potentially rising prices, especially since some other streaming services (notably HBO MAX) are priced similarly or higher. International growth should also propel subscriptions.
Analysts expect revenue to rise 23% in 2021, reaching $29.3 billion, with earnings per share jumping 34% to $8.68.
Sector: Consumer Discretionary
Sector year-to-date returns: 6.5%
Top stock: Amazon.com (AMZN)
With a market cap of $1.2 trillion, Amazon takes up nearly a third of the consumer discretionary sector. Shares are up 34% this year, beating nearly every other stock in the sector, and the company has the highest long-term growth rate, estimated at an annualized 39% over the next three to five years.
The stay-at-home trend has turned Amazon into an indispensable company for millions of Americans. It’s also a leader in streaming video and music, and it runs a thriving cloud-computing business that some analysts view as more valuable than its home-delivery and other services.
The stock has always been pricey and remains so, trading at 131 times estimated 2020 earnings and 65 times 2021 earnings. But with a 47% annualized return over the last five years, shares have handily beaten the S&P 500. It isn’t a stretch to expect the trend to continue if Americans continue to shelter in place more than before the coronavirus pandemic.
Sector year-to-date return: -5.8%
Top stock: NextEra Energy (NEE)
Utilities held up better than the broader market during the selloff and they have lagged behind the market average on the rebound. That is to be expected of an inherently defensive sector. NextEra takes the prize for the highest long-term growth and share returns. The stock is up 6% this year and it’s expected to have 9.2% annualized growth over the next three to five years, beating every other utility in the sector.
NextEra is one of Florida’s largest electric power suppliers and it’s a leader in renewable energy. Analysts expect the company to earn $9.87 a share in 2021 on sales of $21.5 billion. The stock is one of the lower yielding utilities with a yield of just 2.2%, but its total returns have blown past the sector for years, averaging 18.8%, beating the industry average by nearly 12 percentage points.
The utility should benefit from rising demand for renewable energy. Power companies are increasingly switching to natural gas to meet carbon emission targets and demand from consumers for cleaner energy.
Sector: Real Estate
Sector year-to-date return: -4.5%
Top stock: Crown Castle International (CCI)
Crown Castle is a cell-tower real-estate investment trust (REIT) that is seeing solid growth as demand for wireless data and next-generation 5G service expands nationwide. Shares are up 23.8% this year. Long-term growth in earnings per share is estimated at 19.4%.
Oppenheimer analyst Timothy Horan recently upgraded shares of Crown Castle to Outperform, citing its long-term growth potential and attractive valuations. Barron’s recommended Crown Castle—along with tower REITs American Tower (AMT) and SBA Communications (SBAC)—as attractive ways for investors to play the 5G transition.
The outlook for tower REITs looks bright, despite lofty valuations in the sector. Horan expects Crown Castle to increase adjusted funds from operations (a measure of operating profit for REITs) about 10% annually over the long term. Few REITs can match that growth rate, which looks sustainable as long as Americans continue lapping up wireless data.
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