As expected, in late July, the U.S. Federal Reserve cut rates for the first time in a decade. Wall Street initially expressed worry that this was just a “one-and-done” cut, as Fed Chair Jerome Powell said in the press conference that the July cut was a “mid-cycle adjustment” and not the beginning of a rate cutting cycle. Stocks plunged.
Then, Wall Street walked back that worry on day two, and stocks rallied. Reasonably so.
The prior two mid-cycle adjustments in 1995 and 1998 were 75 basis point cuts each. The late July cut was just 25 basis points. Further, Powell said in the presser that the trade war is the biggest headwind, which led to this rate cut. U.S. President Donald Trump is behind the trade war. He wants lower rates. Thus, he is going to drag on the trade war for the foreseeable future, forcing the Fed to cut rates.
Broadly, then, the takeaway is clear. The Fed cut rates in July, and they will likely cut rates once or twice more into the end of the year.
The Fed going into rate-cut mode has hugely positive implications for the stock market. Of particular relevance, low rates will continue to support the growth trade, since low rates justify extended valuations and simultaneously increase the net present value of future profits (which is where growth stocks get all of their value).
As such — as has been the case for all of 2019 — any growth stock with a semi-good story will most likely move higher into the end of the year. By the same logic, any growth stock with a really good story will surge higher.
With that in mind, let’s take a look at five growth stocks with arguably the best stories in the market. So long as rates remain low, this group of stocks should trend meaningfully higher.
YTD Gain: 150%
Back in late 2017, I called e-commerce solutions provider Shopify (NYSE:SHOP) the most exciting stock on the market. Since then, SHOP stock has surged nearly 250% higher, including a robust 150% gain in 2019.
The story here is second-to-none. The world is becoming increasingly decentralized. Single supplier ecosystems are turning into multi-supplier ecosystems, so that the many are enabled to do what only the few could do before — think Uber (NYSE:UBER) and Airbnb. Shopify is a big part of this mega-trend, which I dub the coordinated economy, in that they decentralize and democratize the retail process so that anyone can sell anything to anyone else through any channel, by providing a wide series of very capable selling solutions to the masses.
In this sense, Shopify is enabling an entire new generation of sellers. This new generation has serious momentum. Shopify has reported 50%-plus gross merchandise value growth over the past several quarters, which has fueled 45%-plus revenue growth on top of big gross margins and a rapidly improving operating margin. Yet, Shopify still only commands about 0.2% of global retail sales, so the runway for future growth is very, very big.
Net net, investors have fallen in love with this story, the growth rates and the future growth potential. In response, SHOP stock has been a huge winner. This winning streak will be challenged by valuation at some point (prices above $350 seem fundamentally stretched). But, for the time being, what you have with Shopify stock is one of the market’s best growth stories at a time when growth stories are being rewarded premium valuations.
That combination will persist, and ultimately keep Shopify stock on a winning trajectory for the foreseeable future.
YTD Gain: 130%
Another one of my favorite growth stocks over the past several years has been The Trade Desk (NASDAQ:TTD). It has also been one of the market’s favorite growth stocks over the past few years, too. In the past three years, TTD stock has risen 800%.
The story here is very compelling. The Trade Desk is the leader in a field that’s called programmatic advertising. In short, programmatic advertising is the result of the automation trend converging on the ad industry. Trade Desk employs AI and algorithms to programmatically inform, optimize and enhance ad spend allocations and ad transactions. The whole industry is pivoting toward programmatic advertising because it saves money and produces better results.
As ad dollars have pivoted into the programmatic channel, many of those dollars have flown into The Trade Desk platform. That’s why this company has reported 50%-plus gross spend growth over the past several years, which has, in turn, fueled 50%-plus revenue growth and 50%-plus EBITDA growth. Still, much like Shopify, The Trade Desk commands a relatively small portion of its addressable market, with less than 5% penetration into the global ad market.
As such, with The Trade Desk, you have a red hot stock, a super strong growth story, big growth numbers, and tons of long-term potential. That is a winning combination in today’s low rate environment. So long as rates remain low, TTD stock should continue to move higher.
YTD Gain: 48%
One growth stock that looks particularly compelling here is Square (NYSE:SQ).
The story at Square is just as compelling as the story for any other high-quality growth stock. Square is a payments processor. Specifically, they are a non-cash payments processor. The world is increasingly pivoting from cash to non-cash payments. As this pivot plays out, more and more retailers need machines like the ones Square builds to facilitate a majority of their transactions. The more Square payment processors get deployed — and the more transactions they process — the more money Square takes home in high-margin commission revenue.
Further, Square is innovating rapidly in this space, coming up with new ventures like Square Cash (a peer to peer payments app), Square Capital (a “loans” business for small merchants) and Caviar (a high-end food delivery app). All of these expansions only enhance the Square non-cash payment ecosystem, thereby positioning the company for tremendous long-term growth as non-cash payments become the global norm.
This long-term growth narrative is already playing out. Square has reported 25%-plus gross payment volume growth over the past several quarters, alongside 40%-plus adjusted revenue growth and robust margin expansion. But, top-line growth trends are decelerating, and this deceleration has caused SQ stock to under-perform big growth peers over the past year (up “just” 30% in the past year).
This under-performance is an opportunity. Square’s top-line growth trends aren’t decelerating by much — around 1 percentage point every quarter, which is relatively meaningless on a 25%-plus volume growth rate. Further, margins are ramping higher, and the secular growth narrative remains very healthy (everyone is still pivoting to non-cash payments).
Overall, then, SQ stock is a high quality growth stock with a great story, big growth numbers, and tons of long term potential. But, SQ stock has under-performed its high-growth peers recently. This combination sets the stock up for nice gains in the back half of 2019.
YTD Gain: 60%
A top growth stock which I’ve been bullish on for a long time and remain bullish on today is Chegg (NASDAQ:CHGG), the digital education company whose shares are up 60% year-to-date and nearly 750% over the past three years.
Chegg is the future of education. High school and college students are at the forefront of the digitization of consumer interactions. They are the ones sending hundreds of Snaps a day, posting dozens of Instagram Stories a day, and binge-watching Netflix (NASDAQ:NFLX) shows. Yet, their education experiences are very different. The academic world has been slow to adopt digital trends, and as such, a majority of the education experience remains physical and is antiquated — big textbooks, notes in class, at-school tutoring hours, etc.
Chegg is changing all of this. They are finally creating a long overdue, much needed connected education platform that digitizes the education experience and makes it more relevant to today’s students. This platform includes things like online textbooks and textbook solutions, on-demand e-tutoring, on-demand digital writing help, and a variety of other on-demand, online education services.
These services — because they are relevant to today’s students — are rapidly gaining mainstream traction. Chegg has reported 30%-plus services revenue and subscriber growth for the past several quarters. Yet, Chegg has just 3.1 million subs, out of 36 million high school and college students in the U.S. alone, meaning the company is only at 10% domestic penetration, with 0% international penetration.
Thus, the runway for future growth is very long. That long growth runway, coupled with a winning story and big growth numbers, should keep CHGG stock on a winning path for the foreseeable future, especially with rates stuck in depressed territory.
YTD Gain: 60%
The other four growth stocks on this list are tech stocks. Lululemon (NASDAQ:LULU) is not. It’s an apparel company. Nonetheless, this apparel stock has kept up with the tech sector in 2019, posting a 60% gain year-to-date.
It’s no secret that the athletic apparel sector is red hot. Thanks to the rise of visual-sharing social media apps, consumers are now more self-aware of their image than ever before. As such, they are more obsessed than ever with looking good, eating right and being fit. A big part of this means being active and going to the gym (or at least looking like you do). That means wearing athletic apparel everywhere, all the time.
As consumers have increasingly shifted toward wearing athletic apparel in greater volume, they aren’t just throwing on any athletic t-shirt or shorts. These trend-forward consumers are wearing the cool brands. The coolest brand in athletic apparel right now is Lululemon, thanks to the company’s wide portfolio of high quality and aesthetic products.
There are no signs that Lululemon’s momentum is slowing at all. The company has reported mid-teens or better comparable sales growth for the past several quarters, alongside strong gross margin performance and equally robust profit growth. So long as Lululemon keeps firing off these big growth numbers, LULU stock will trend higher — barring any Black Swan event on the trade front.
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