Look for growth even when the economy slows.
According to the St. Louis Federal Reserve Bank, U.S. GDP growth clocked in at 1.9%, 2.9% and 2.7% GDP growth in the first three quarters of 2019, making the 3% growth in 2018 essentially impossible to catch up with. Investors will need to look even harder to find growth companies for their portfolios as the economy slows. Growth stocks have left value stocks in the dust throughout the decade-long bull market, but stocks like the popular FANG group have proven unreliable in recent quarters as the specter of Big Tech regulation looms large. Going into the year, Morningstar considered these names some of the best growth stocks to buy for the year, and each had either a four- or five-star rating on Morningstar's five-star rating scale. Here's a look at how they've done.
Adobe (ticker: ADBE)
Over the last 11 quarters, Adobe has consistently reported revenue growth of greater than 20%. Analyst Dan Romanoff says Adobe's earnings and revenue exceeded expectations last quarter, and the company's digital media and digital experience businesses have been particularly strong growth sources. Adobe's large acquisitions of Magento and Marketo in 2018 have demonstrated the company's willingness to supplement its growth via mergers and acquisitions. Despite consistently high growth, Romanoff notes that software stocks are "generally expensive" right now, and although ADBE has a wide moat, Morningstar currrently rates it a three-star stock, assigning it a "fairly valued" rating and $296 fair value estimate.
YTD return: 22%
Cerner Corp. (CERN)
Cerner is the largest stand-alone health care IT company in the U.S. Analyst Soo Romanoff says Cerner is deeply entrenched in the complex health care system, and competitors have a large barrier to entry into the market. Given increasing regulation and changing reimbursement structures, health care providers are constantly being forced to update their IT systems. Customer switching costs are prohibitively high. Romanoff says Cerner has locked down a quarter of the health care electronic health record market, and that about 80% of its annual revenue is recurring. Morningstar has an "undervalued" rating and $78 fair value estimate for CERN stock, $12 higher than it was in February.
YTD return: 28%
Cloud giant Salesforce has consistently kept revenue growth above 22% over the past two years, and its $4 billion in revenue last quarter set an all-time second quarter record. Analyst Dan Romanoff says CRM stock is trading at a discount given its impressive growth numbers, wide moat and deep bench of executive talent. The 2018 acquisition of Mulesoft and 2019 acquisition of Tableau puts even more distance between Salesforce and its nearest competitors. Salesforce experienced growth across the board in the most recent quarter, including 22% growth in service cloud revenue. Morningstar has an "undervalued" rating and $186 fair value estimate for CRM stock.
YTD return: 9%
CSX Corp. (CSX)
When investors think of growth stocks, railroads may not be the first to come to mind. In fact, Morningstar now considers CSX a "large cap core" stock, having classified it in the growth category to start the year. Analyst Keith Schoonmaker notes that CSX's 60.3% operating ratio in 2018, a measure of railroad operating efficiency, was an all-time record for U.S. Class I railroad companies. And yet CSX continues to improve: operating ratio improved to a second quarter record of 57.4% last quarter (lower is better), 120 basis points better than usual. Although revenues at the railroad are essentially flat, CSX is able to consistently grow profitability through continuously improving cost efficiency, and the second largest U.S. railroad enjoys cost and scale advantages. "Its right of way and installed track form a nearly impenetrable barrier to entry," says Schoonmaker. Morningstar has an "undervalued" rating and $78 fair value estimate for CSX stock.
YTD return: 14%
It wouldn't be a true list of growth stocks without at least one FANG member. Amazon dipped barely below 20% revenue growth for the first time in late 2018, but analyst R.J. Hottovy says the company still has plenty of growth levers to pull in coming years. Hottovy says Amazon is transitioning from a pure growth stock to a cash cow thanks to its high-margin cloud services business. Amazon is also adding market share in its dominant e-commerce business. Morningstar has an "undervalued" rating and $2,300 fair value estimate for AMZN stock.
YTD return: 21%
Microsoft Corp. (MSFT)
Amazon's leading cloud competitor, Microsoft, is a huge large-cap company that is generating impressive growth numbers from its Azure cloud platform. Microsoft has been around a lot longer than the FANG stocks, but its aggressive restructuring as a cloud services company has generated a string of nine consecutive quarters of at least 12% revenue growth. Analyst Dan Romanoff says Microsoft's intelligent cloud revenue growth, which had been accelerating for nine straight quarters to start the year, grew by 64% last quarter. Microsoft has emerged as Amazon's only true cloud competitor. Morningstar has an "undervalued" rating and $155 fair value estimate for MSFT stock, up a full $30 from February this year.
YTD return: 34%
Activision Blizzard (ATVI)
Activision is one of the world's largest video game publishers, with leading franchises such as "Call of Duty," "World of Warcraft" and "Overwatch." Analyst Neil Macker is projecting 6% compound annual revenue growth from Activision over the next four years, driven by a console upgrade cycle, a surge in PC gaming and expansion of the mobile gaming market. Macker says Activision should grow its operating margins from 18.7% in 2017 to 29.1% in 2023. Despite starting the year classified as an undervalued growth stock, Morningstar now labels ATVI a large cap core stock priced near fair value, which it pegs at $62 per share. After gaining 20% year to date in a year ATVI is consciously allowing sales to fall as it focuses on development over marketing, so these shifting analyst opinions make sense.
YTD return: 20%
Expedia Group (EXPE)
Morningstar is projecting 9.6% annual revenue growth for online travel giant Expedia over the next five years. Analyst Dan Wasiolek says that growth will come from a number of different sources. He is projecting midteens percentage revenue growth from VRBO/HomeAway, 5% annual revenue growth from Trivago, and 9% annual revenue growth from Expedia's core platforms over the next five years. In addition, Wasiolek says Expedia's Egencia corporate travel platform will add 11% long-term annual revenue growth. Morningstar has an "undervalued" rating and $185 fair value estimate for EXPE stock.
YTD return: 16%
The best growth stocks to buy this year:
-- Adobe (ADBE)
-- Cerner Corp. (CERN)
-- Salesforce.com (CRM)
-- CSX Corp. (CSX)
-- Amazon.com (AMZN)
-- Microsoft Corp. (MSFT)
-- Activision Blizzard (ATVI)
-- Expedia Group (EXPE)
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