High growth often comes with a heaping side of high risk. When exciting tickers are priced for absolute perfection, there's often nowhere to go but straight down.
Don't get me wrong -- there is such a thing as a high-quality growth stock that would work fine in your retirement portfolio. It just isn't always easy to tell those top-notch investments apart from the latest flash in the pan.
So we asked for some help. A handful of your fellow investors here at The Motley Fool were asked to share their best ideas for smart growth investors right now. Read on to see why they believe that Universal Display (NASDAQ: OLED), SodaStream (NASDAQ: SODA), and A.O. Smith (NYSE: AOS) offer that perfect blend of low risk and high reward right now.
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Sparkling profit growth
Demitri Kalogeropoulos (SodaStream): Sometimes a near-death experience is just what a company needs to really get its business in order. At-home carbonated beverage machine maker SodaStream is back in aggressive growth mode these days, with sales having jumped by 20% over the recent holiday quarter. That success fed into a 14% revenue increase for the year and added to an impressive rebound following the brutal sales dive that occurred between fiscal years 2013 and 2016.
The company's sparkling-water focus is clearly resonating with customers, but there's more good news for investors, given that reduced production costs are leading to consistently stronger profits. Operating margin jumped to 16.3% of sales last quarter from 14.3% a year ago. As a result, SodaStream's net income improved by 67% to a new record.
The company is predicting sales will rise 12% in 2018, which would put it back into record revenue territory for the first time in four years. New machine launches should help, and so should an aggressive move into key international markets such as France. Continued profitability gains, meanwhile, will probably deliver operating income of $90 million, compared with the $49 million it generated at its previous peak sales year in 2013.
The perfect risk-reward balance
Anders Bylund (Universal Display): The trick to successful investing in growth stocks is to find the right balance between the promise of future returns and the risks that could trigger a big loss instead. Let's face it -- growth stocks are often priced for absolute perfection. The smallest slip, trip, or fall along the way to that big, bright future in every bullish investor's head can trigger a huge drop instead.
That's what happened to Universal Display in February. The technology researcher crushed Wall Street's targets in the fourth quarter but followed up with modest growth projections for the new fiscal year. Universal Display investors took it on the chin, as share prices fell 16% the next day. All told, the stock is trading 30% lower so far in 2018.
But smart investors are treating this as an inviting discount, on which you can build big returns in the long run.
You see, management's "soft" guidance is just a matter of timing. The market for light-emitting diode (OLED) screens grows in leaps and bounds, but it's a cyclical industry. Sometimes, the hardware producers refocus on upgrading their manufacturing infrastructure rather than maxing out production volumes with their aging equipment and processes. That's where we stand in 2018, and Universal Display's management expects the OLED industry's annual production capacity to grow 50% larger over the next two years.
So Universal Display is trading lower for all the wrong reasons. A brief respite in 2018 should be followed by another multi-year streak of rampant growth in 2019 and beyond. Price-to-earnings ratios stand near multi-year lows, and Universal Display's revenues and EBITDA profits have never been healthier:
That's a whole lot of upside promise rolled into a low-cost stock that limits your downside risk. Universal Display is a great investment in my book.
A play on China's growth few are talking about
Tyler Crowe (A.O. Smith): Typically, the investment theme of a growing Chinese economy and the expansion of the middle class there comes down to calling out major Chinese tech companies as "the (insert major company here) of China." This isn't the only way to invest in China, though. One way that few are talking about is water heater manufacturer A.O. Smith.
Yes, water heaters. The appliance in your house you probably think the least about until it breaks. Water heaters are, surprisingly, a relatively stable business. More than 85% of water heater sales in North America are replacements, and it's one of those products that you don't have to sell at a discount, because when you need one, you can't typically wait around for a deal. As North America's largest water heater supplier, A.O. Smith has a large, reliable customer base that generates lots of cash that it can now plow into its growing presence in China.
Entering into the global middle class for many involves several household appliances such as water heaters, and A.O. Smith has done an incredible job selling to this market. Over the past 10 years, management has been able to grow revenue 21% annually and capture the largest market share of any water heater manufacturer in China. Sales outside North America now make up 35% of overall revenue, and there are few signs that this growth is slowing down.
With a new manufacturing facility going up in China and efforts to penetrate the Indian market in a similar fashion to China's, there is lots of growth in what many would assume is a go-nowhere industry.
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Anders Bylund owns shares of Universal Display. Demitrios Kalogeropoulos has no position in any of the stocks mentioned. Tyler Crowe owns shares of A. O. Smith. The Motley Fool owns shares of and recommends Universal Display. The Motley Fool also owns shares of SodaStream. The Motley Fool has a disclosure policy.