Ideally, you want to buy and hold shares of companies that will grow at a healthy pace for a long time. Paying a premium for a growth stock makes sense if that growth both materializes and leads to solid profits down the road.
There are a lot of growth stocks out there, but three of our Motley Fool contributors have identified three that would be great additions to your portfolio in July. Here's what you need to know about Texas Roadhouse (NASDAQ: TXRH), Kulicke & Soffa Industries (NASDAQ: KLIC), and DexCom (NASDAQ: DXCM).
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A steakhouse slowly aged to perfection
Nicholas Rossolillo (Texas Roadhouse): The restaurant industry is a challenging one. Consumers have plenty of choices, and keeping diners loyal to a brand can be a tough task. To make matters worse, the industry has had to cope with self-inflicted pain the past few years as over-expansion has caused foot traffic at the average store to decline the last few years.
Bucking the trend is casual steakhouse chain Texas Roadhouse. The restaurant has avoided the struggle most of its peers have experienced by staying true to its primary market: underserved suburban America. Providing big portions at fair prices to working-class families is still only part of the story, though. While many chains out there have put together aggressive expansion plans, Roadhouse has stayed disciplined and opened new locations at a more modest rate. Only 30 new stores will be opened this year, only about a 5% increase in total count -- which includes a new sports bar brand called Bubba's 33 that is being tested in select markets.
The stock has also been a slow-and-steady story for over a decade now, but the results have been impressive nonetheless. Shares have doubled nearly five times over at this point, but there's reason to believe they're still a good buy even close to an all-time high. When management reported on progress a couple months ago, same-store sales growth was accelerating. This metric, which measures a combination of average guest ticket and foot traffic, is one of the most important factors driving a restaurant's profit margins. A month into the second quarter of 2018, and same-store sales were up an impressive 8.5% compared to a 4.9% increase in the first quarter. With Texas Roadhouse keeping tight control over expenses and getting the most out of its existing stores, this stock is one of the best restaurant buys out there right now.
A small-cap semiconductor company
Tim Green (Kulicke & Soffa Industries): Kulicke & Soffa manufactures equipment used by the semiconductor industry to package semiconductor components. It's a small company, with annual revenue of about $800 million.
The semiconductor equipment industry is cyclical, so Kulicke & Soffa's results can swing up and down along with demand. But the long-term growth of the semiconductor industry, as well as the company's efforts to diversify into advanced packaging, should keep the numbers moving in the right direction in the long run.
Kulicke & Soffa sees its available market growing from $2.2 billion in 2017 to $2.7 billion in 2021. Its core business will drive some of this growth, but demand for advanced packaging and equipment used for automotive products like sensors and cameras will be the key drivers. Kulicke & Soffa also has plenty of cash at its disposal to make strategic acquisitions. The company's balance sheet featured over $600 million of net cash at the end of its latest quarter.
Kulicke & Soffa doesn't trade like a growth stock. Backing out the net cash, the stock trades for less than 8 times the average analyst estimate for 2018 earnings. Since earnings tend to fluctuate, this earnings multiple makes the stock look a bit cheaper than it truly is. Average earnings over the next few years could be lower if the current boom in sales dissipates. But even so, with plenty of long-term growth potential, Kulicke & Soffa is a solid growth stock pick.
This diabetes stock's revolutionizing treatment
Todd Campbell (DexCom): The diabetes market is getting bigger, and technology that helps patients better track blood sugar levels and dose their insulin is going to play a big role in the future. According to the Institute for Alternative Futures, the number of Americans with diabetes will increase from about 30 million today to nearly 55 million in 2030, and as a result, spending on diabetes is expected to soar.
A good piece of that spending could find its way to DexCom's top line. DexCom's a leading manufacturer of continuous glucose monitors (CGM) that track real-time changes in blood sugar to help patients avoid dangerous highs and lows that can accelerate diabetes progression.
CGMs use sensors, software, and hardware to record, analyze, and report blood sugar levels in real time, and they're already winning over patients who require frequent insulin injections. In 2017, DexCom's sales grew 25% to $718 million.
Last year's performance was solid, but I think sales could increase by more this year following the launch of DexCom's newest CGM, the G6. In 2017, DexCom's sales were held back by the launch of Abbott Labs' (NYSE: ABT) Freestyle Libre, the first CGM to remove the need for diabetes patients to stick their fingers to confirm readings or to calibrate the system.
Abbott's advantage disappeared earlier this year when the FDA approved the G6. Importantly, the G6 is arguably a better system. The G6's sensors can be worn longer than those used with the Freestyle Libre, it includes alarms for blood sugar highs and lows that the Freestyle Libre doesn't, it has a shorter warm up time than the Freestyle Libre, and unlike the Freestyle Libre, it automatically sends data to a device for display.
Those advantages could spark sales growth, but the use of CGMs in new automated insulin delivery systems is what really excites me about DexCom's CGM opportunity. Recently, Tandem Diabetes won an FDA green light for a system that combines DexCom's CGM with its insulin pump to administer insulin automatically, and DexCom's CGMs are also being evaluated in a similar system that's being developed by Insulet (NASDAQ: PODD). If these systems win widespread use, and I think they will, then it could be a boon to DexCom investors.
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Nicholas Rossolillo owns shares of Texas Roadhouse. Timothy Green owns shares of Kulicke & Soffa Industries. Todd Campbell has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Texas Roadhouse. The Motley Fool recommends Insulet. The Motley Fool has a disclosure policy.