Growth boosts valuation multiples, but it doesn’t always last forever. Companies that cannot maintain it are often penalized with large declines in market value, a lesson ingrained in investors who lost money in tech stocks during 2022.
Deciphering which businesses can sustain their high growth rates is a challenge for even the most seasoned professionals, which is why we started StockStory. Keeping that in mind, here are two growth stocks with significant upside potential and one whose momentum may slow.
One Growth Stock to Sell:
Insteel (IIIN)
One-Year Revenue Growth: +20.9%
Growing from a small wire manufacturer to one of the largest in the U.S., Insteel (NYSE:IIIN) provides steel wire reinforcing products for concrete.
Why Does IIIN Worry Us?
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Sales trends were unexciting over the last five years as its 5.9% annual growth was below the typical industrials company
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Free cash flow margin dropped by 5 percentage points over the last five years, implying the company became more capital intensive as competition picked up
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Waning returns on capital imply its previous profit engines are losing steam
Insteel is trading at $25.69 per share, or 15.4x forward P/E. To fully understand why you should be careful with IIIN, check out our full research report (it’s free).
Two Growth Stocks to Watch:
HubSpot (HUBS)
One-Year Revenue Growth: +21.1%
Born from the idea that traditional interruptive marketing was becoming less effective, HubSpot (NYSE:HUBS) provides an integrated platform that helps businesses attract, engage, and manage customer relationships through marketing, sales, service, and content management tools.
Why Could HUBS Be a Winner?
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Billings have averaged 22.3% growth over the last year, showing it’s securing new contracts that could potentially increase in value over time
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Prominent and differentiated software culminates in a stellar gross margin of 83.7%
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Software platform has product-market fit given the rapid recovery of its customer acquisition costs
HubSpot’s stock price of $197.69 implies a valuation ratio of 2.5x forward price-to-sales. Is now a good time to buy? Find out in our full research report, it’s free.
Planet Labs (PL)
One-Year Revenue Growth: +25.9%
Pioneering the concept of “agile aerospace” with hundreds of small but powerful satellites, Planet Labs (NYSE:PL) operates the world’s largest fleet of Earth observation satellites, capturing daily images of our planet to provide insights on deforestation, agriculture, and climate change.
Why Will PL Beat the Market?
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Sales pipeline is in good shape as its backlog averaged 157% growth over the past two years
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Incremental sales over the last two years have been highly profitable as its earnings per share increased by 65.4% annually, topping its revenue gains
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Free cash flow turned positive over the last five years, showing the company has crossed a key inflection point