It’s been quite a journey for the investing community since the start of this decade. After major stock indexes moved between bear and bull markets for four years in a row, optimists now appear to be in clear control.
These fluctuations were particularly pronounced among growth stocks Nasdaq Composite (NASDAQINDEX: ^IXIC). After losing 33% of its value during the 2022 bear market, the Nasdaq Composite is up 57% since the start of 2023 and has firmly entered a new bull market.
However, much of the Nasdaq’s gains are thanks to the Magnificent Seven, meaning there are still bargains to be found in growth stocks. Long-term investors simply have to be willing to seek them out.
Below are four exceptional growth stocks you’ll regret not buying in the new Nasdaq bull market.
Visas
The first high-growth stock that has historically been a brilliant buy in every setback and is an incredibly attractive stock in the fledgling Nasdaq bull market is the payment processor Visas (NYSE:V).
As a long-time shareholder in leading payments facilitator Visa, all I can say about this company is that it is cyclical. Downturns in the US economy are normal and inevitable. If the next recession hits, consumer and business spending is expected to decline, which would impact Visa’s ability to collect fees from merchants.
The flip side of this coin is that the US economy has been expanding for significantly longer than it has been contracting. While there have been two periods of growth lasting longer than 10 years since the end of World War II, none of the 12 recessions in the last 78 years have lasted longer than 18 months. Visa is in the best position to benefit from extended periods of economic recovery.
It is a company that exploits growth opportunities in both developed and emerging markets. For example, in the US (the world’s largest consumer market), it is the overwhelming leader in purchase volume across credit card networks. It also has more than enough capital and leverage to organically expand its payments infrastructure into underbanked emerging markets (e.g. Southeast Asia, Africa and the Middle East) or buy into higher-growth regions, as it did in 2016 with the Acquisition of Visa Europe. Cross-border volumes rose 16% in the December quarter compared to the same period last year.
As I’ve pointed out before, management’s decision to avoid lending is a key reason why Visa’s profit margin remains above 50%. Although some of its competitors in the payment processing space act as lenders, this exposes these companies to potential loan defaults and defaults when recessions occur. Visa does not have to worry about setting aside capital as it is not a lender.
Visa’s forward price-to-earnings (P/E) ratio of 24.7 represents a 15% discount to its forward five-year earnings multiple.
PubMatic
A second exceptional growth stock that you’ll be bummed about not adding to your portfolio as the Nasdaq stretches its proverbial legs in a new bull market is the adtech company PubMatic (NASDAQ:PUBM). PubMatic’s cloud-based programmatic advertising platform helps publishers sell their digital exhibition space.
Similar to Visa, the health of the U.S. economy tends to be the biggest headwind for advertising companies like PubMatic. Companies aren’t afraid to cut their advertising budgets at the first sign of trouble. But as noted, the U.S. economy spends much more time growing than slowing. This is excellent news for opportunistic long-term investors in ad-supported stocks.
Thanks to the US elections, this should be a particularly good year for advertising companies. GroupM estimates that political ad spending in 2024 is expected to rise 31% to $15.9 billion compared to the previous election cycle in 2020. With more advertising dollars than ever shifting to digital channels, which is what PubMatic specializes in, the company is ideally positioned to capitalize on this surge in political ad spending.
Another reason investors can expect PubMatic to outperform in the coming years is management’s (in retrospect) wise decision to build its own cloud-based programmatic advertising platform. Although it would have been faster and more cost-effective to rely on a third-party provider, the decision to develop its own infrastructure means that as the company scales its business, it retains a larger portion of its revenue. In short, it should result in a higher operating margin.
Despite being a small-cap company, PubMatic is flush with cash. The company ended 2023 with $175.3 million in cash with no debt and repurchased more than $59 million of common stock last year. Should a recession loom, PubMatic’s balance sheet is ready.
Warner Bros. Discovery
The third great growth stock clamoring to be bought along with the Nasdaq in the early stages of a bull market is the media titan Warner Bros. Discovery (NASDAQ:WBD). While its revenue growth doesn’t meet the typical definition of a “growth stock,” Wall Street’s expected 20% annual earnings growth for the company through 2028 makes this legacy media giant well-known.
Not to sound like a broken record, but the economy is important. A weaker advertising spending climate has weighed heavily on Warner Bros. Discovery’s legacy TV segment. Additionally, the shift to streaming has resulted in significant operating losses in the company’s direct-to-consumer (DTC) business.
Luckily, PubMatic isn’t the only company set to benefit from a significant increase in political ad spending this year. While it has proven challenging for legacy media companies to move away from cable, the election cycle is expected to significantly boost Warner Bros. Discovery’s revenue and bottom line in 2024.
Arguably more importantly, the company’s DTC division has significant pricing power. The ability to increase monthly subscriber prices, coupled with a deliberate reduction in selling, general and administrative costs, is Warner Bros. Discovery’s recipe for eventual recurring profitability for its DTC segment. Despite rising subscription prices, global streaming subscribers and average revenue per user increased slightly last year, including acquisitions.
Also, don’t overlook this company’s ability to generate free cash flow (FCF). Although the writers’ strike significantly reduced spending last year, Warner Bros. saw an 86% year-over-year increase in reported FCF. Generating sufficient cash from operations should help the company manage its debt burden.
Warner Bros. Discovery’s stock and operating performance won’t change a penny. However, the pieces of the puzzle are in place to enable investors to achieve high returns over the long term.
AstraZeneca
The fourth exceptional growth stock you’ll regret not buying in the new Nasdaq bull market is none other than a pharmaceutical giant AstraZeneca (NASDAQ:AZN).
The major headwind drug developers face is the limited period of sales exclusivity for their novel therapies. Generic drug manufacturers always seem to be waiting to strike when patent exclusivity for their best-selling drugs expires. While AstraZeneca has struggled with the patent crisis over the past decade, the company’s extensive portfolio of novel drugs is now in full swing.
Specifically, AstraZeneca runs like a well-oiled machine in three business segments: Oncology, Cardiovascular, Renal Diseases and Metabolism (CVRM) and Rare Diseases, which respectively delivered constant currency sales growth of 20%, 18% and 12% last year.
AstraZeneca’s cancer medicines division has four blockbuster therapies that benefit from improved early cancer detection diagnostics, strong pricing power and brand expansion opportunities. In particular, sales of the monoclonal antibody Imfinzi increased last year by 55% on a currency-neutral basis to $4.24 billion.
Farxiga has done most of the work on CVRM, the next-generation type 2 diabetes therapy. Sales rose 39% in constant currency to $5.96 billion in 2023. Farxiga displaced the non-small cell lung cancer drug Tagrisso as AstraZeneca’s top-selling drug.
Finally, treatments for rare diseases were a bright spot. When AstraZeneca acquired Alexion Pharmaceuticals in July 2021, it got its hands on the blockbuster ultra-rare disease drug Soliris and its next-generation successor Ultomiris. Because Alexion has developed a replacement for Soliris, AstraZeneca can retain more of its cash flow without fear of generic competition.
A forecast P/E ratio of 13.5 seems more than fair for a rock-solid drugmaker that’s expected to grow profits at an average rate of 13.2% per year through 2028.
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Sean Williams has held positions at PubMatic, Visa and Warner Bros. Discovery. The Motley Fool has positions in and recommends PubMatic, Visa, and Warner Bros. Discovery. The Motley Fool recommends AstraZeneca Plc. The Motley Fool has a disclosure policy.
4 Stocks With Exceptional Growth You’ll Regret Not Buying in the New Nasdaq Bull Market was originally published by The Motley Fool