Following the stock market bottom in March 2020, growth stocks dominated the list of best-performing stocks for the first year of the new bull market. Since then, growth stocks have been mired in a brutal bear market. There is no better example of this than Cathie Wood’s Ark Innovation ETF (ARKK), which had a 391% gain from March 2020 to its high in February 2021. Since then, ARKK has given back most of these gains and is down 60% from these lofty levels.
The major factor behind this sharp decline is increasing inflationary pressures, resulting in expectations that the Fed will hike 7 times this year. Rising inflation and interest rates are bearish for growth stocks because it makes their future cash flows less valuable. However, we also know that such severe selling and oversold markets also create an opportunity to buy high-quality stocks at a discount.
The key is to look for companies whose earnings momentum and growth are unaffected by changes in economic or monetary conditions. Therefore, investors should consider buying the following 3 high-quality growth stocks: Veeva Systems (VEEV), Resmed, Inc. (RMD), and Zoetis (ZTS).
Veeva Systems (VEEV)
VEEV is a cloud computing and enterprise software company for the healthcare, pharmaceutical, and life sciences industries. It provides software solutions for the unique needs of companies in these industries, from meeting regulatory standards to conducting clinical trials to managing operations.
Thus, it’s positioned at the intersection of two booming trends - healthcare and cloud computing - which show no signs of exhaustion and has birthed some of the biggest stock market winners in recent history.
The healthcare sector’s growth is fueled by demographics due to an aging population in developed countries all over the world, increased government spending, and the constant stream of innovations that lead to new treatments. Healthcare spending as a share of GDP has risen to 18% in 2020, from under 12% in 1990.
VEEV combines the growth and high margins of a cloud computing company with the attractive economics of the healthcare industry that has high switching costs and wide moats, leading to high rates of recurring revenue.
These positives are reflected in VEEV’s last earnings report which shows a 26% increase in revenue and a 28% jump in operating income. Next quarter, analysts expect 13% earnings growth. This combination of earnings growth and stock price deflation has resulted in valuations becoming quite attractive, especially considering that it has profit margins that are more than double that of the S&P 500 and expectations of double-digit earnings growth over the next 5 years.
Thus, it’s not surprising that VEEV has an overall B rating, which translates to a Buy in our POWR Ratings system. It also has an A for Quality as it’s one of the leading stocks in a large total addressable market with only a handful of competitors. VEEV also has a B for growth makes sense given its intersection of two large and growing markets - healthcare and cloud computing. Click here to see more of VEEV’s POWR Ratings including grades for Value, Momentum, and Stability.
Resmed, Inc. (RMD)
RMD develops, manufactures, distributes, and markets medical devices and software applications for the healthcare market. The company operates in two segments: Sleep and Respiratory Care; and Software as a Service.
RMD provides treatments for issues like sleep apnea with its CPAP devices and masks as well as devices for obstructive pulmonary disease, neuromuscular disease, and other respiratory-related conditions. Unfortunately due to rising rates of chronic health issues like diabetes and obesity, the demand for RMD’s products is only growing.
This makes RMD a high-quality growth stock as its long-term prospects are disconnected from short-term issues like economic growth rates or monetary policy. Instead, RMD is serving a growing market with products that are essential for improving quality of life. Due to their nature, these products also have high margins and rates of recurring revenue.
We can see this momentum in its recent earnings report which showed revenues increasing by 12% and net income by 5%. Next year, analysts forecast revenue growth and EPS growth of 17% and 15%, respectively.
RMD is also a standout in terms of the POWR Ratings with an overall B rating which translates to a Buy. The POWR Ratings assess stocks by 118 distinct factors, each with its own weighting.
RMD has strong ratings across the board including a B grade for Growth as analysts are forecasting double-digit revenue growth over the next decade. Within the Medical – Devices & Equipment industry, RMD is ranked #33 out of 165 stocks. Click here to see RMD’s complete POWR Ratings.
Zoetis (ZTS).
ZTS was spun off from Pfizer (PFE) in 2013 and is now the leading manufacturer and producer of animal health products including medicines, vaccines, and diagnostic products. Since its debut, the stock is up more than six-fold.
One major factor in Zoeitis’ growth is that pet ownership is on the rise and spending on pets is also rising. These trends have been in place for decades and are likely to persist, creating a positive tailwind for animal health companies like ZTS. Additionally, more people are choosing to buy health insurance for their pets as well.
The weakness in growth stocks has led to ZTS’ price pulling back by 30%. However, its recent earnings report shows that the company continues to have strong momentum. The company reported an 11% increase in revenue and 14% increase in earnings. For the full year, analysts forecast 16% revenue growth and 21% EPS growth.
Given these factors, it’s not surprising that ZTS has a B rating, which equates to a Buy in our proprietary rating system. B-rated stocks have posted an average annual performance of 21.1% which compares favorably to the S&P 500’s average gain of 8%.
In terms of component grades, ZTS has an A for Quality and a B for Stability. ZTS is one of the leading companies in a growing sector. It also is returning cash to shareholders via its dividend and through share buybacks. Click here to get more information about ZTS’ POWR Ratings.
VEEV shares were trading at $228.09 per share on Monday afternoon, up $2.14 (+0.95%). Year-to-date, VEEV has declined -10.72%, versus a -8.31% rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles.
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