One of the most popular buzzwords in investing today is “compounders.” Growth-oriented investors looking for the next
The idea is that stock prices should compound in line with revenue and profits, enabling investors to generate high returns over a holding period of five to 10 years. The ultimate goal is to find the elusive “10 bagger”—a stock that returns 10 times what you paid for it.
Wall Street analyst notes and client letters from investment pros are replete with compounder references. Many of the next generation of value managers, identified in a Barron’s cover story in May, are seeking such shares, rather than the traditional value fare of cheap stocks.
Their search has become more challenging, because buyers are paying lofty prices for high-growth stories. Really big winners are scarce. Only about 35 companies in each of a long series of 10-year periods have compounded their stock prices at 20% or more annually, resulting in at least a sixfold increase, according to Durable Capital Partners.
Barron’s sought to identify smaller candidates. We talked to investment managers and came up with an eclectic list of 10 stocks, most with market values under $10 billion. Here are the selections, in alphabetical order:
|Company / Ticker||Recent Price||YTD Change||2021E P/E||2021E Price/Sales||2022E P/E||2022E Price/Sales||LT Growth Rate*||Market Value (bil)||Comment|
|Amedysis / AMED||$185.15||-37%||30.2||2.7||27.7||2.4||10.5%||$6.3||Leader in home health care|
|Amyris / AMRS||13.64||121||NM||10.4||NM||9.7||NA||4.1||Leading company in synthetic biology|
|Booz Allen Hamilton Holding / BAH||81.73||-6||19.4||1.3||17.7||1.2||8.6||11.0||Defense-department consultant|
|J.B. Hunt Transport Services / JBHT||172.76||26||25.8||1.5||22.2||1.4||18.4||18.2||Strong in intermodal freight|
|Marriott Vacations Worldwide / VAC||147.15||7||40.9||1.6||15.7||1.4||NA||6.3||Top company in vacation timeshares|
|SiteOne Landscape Supply / SITE||197.10||24||45.7||2.6||43.5||2.5||19.3||8.8||Big supplier of landscaping supplies|
|Staar Surgical / STAA||138.19||74||192.3||28.6||140.8||22.5||30.0||6.6||Maker of implantable lens for myopia|
|Stitch Fix / SFIX||44.38||-24||NM||1.9||1890.3||1.7||30.0||4.8||Data-driven subscription clothing firm|
|Trex / TREX||105.94||27||51.9||10.5||43.6||9.3||18.8||12.2||Top maker of synthetic wood decking|
|Upwork / UPWK||44.31||28||NM||11.4||556.8||9.2||NA||5.7||Online clearinghouse for free-lancers|
E=Estimate. BAH estimates are for fiscal years ending March 2022 and March 23. SFIX estimates are for fiscal years ending July 2022 and July 2023. NM=Not Meaningful. NA=Not Available. *The annual EPS growth the company can sustain over the next 3-5 years.
(AMED), a provider of home healthcare and hospice services, has a national footprint in a still-fragmented business.
“There is going to be massive consolidation of the industry” predicts Dan Cole, a manager of the Columbia Small-Cap Growth fund. “Healthcare is moving to the home.”
Amedisys stock is up more than tenfold in the past decade. But the shares, around $185, are off nearly 30% after the company recently cut 2021 financial guidance, citing Covid-related staffing and cost issues, mostly in acquired hospice operations. The 2021 earnings estimate is now $6.13 a share, down from nearly $7. The stock trades for 30 times projected 2021 profits. Cole says that the company remains capable of generating 10% annual gains in earnings per share.
(AMRS) is a leader in synthetic biology. It fans say its opportunity is to supplant, in an eco-friendly way, a range of products now made from petrochemicals, animals, and plants.
Using genetically re-engineered yeast and sugar cane, Amyris produces such things as squalane, a high-end moisturizer formerly made from shark livers; vanillin, the flavoring for vanilla; and a no-calorie sweetener normally derived from plants. The stock trades around $13.
Barron’s wrote favorably on the company in July. Amyris sees sales reaching $2 billion by 2025, up from an estimated $400 million this year, driven by its consumer brands.
“The world needs clean chemistry, and Amyris is the point on the spear to create it,” says Randy Baron, a portfolio manager at Pinnacle Associates, which owns Amyris shares. He thinks they could hit $75 by the end of 2022.
Booz Allen Hamilton Holding
(BAH) is an important consultant to the Defense Department and other agencies. The U.S. government accounted for 97% of its revenue in its latest fiscal year. Booz Allen has built robust ties to the government over the years by providing an array of services, like cybersecurity. Its stock trades around $81, for a 1.8% yield.
“It has built a strong, partnership-like culture and has a long record of steady growth,” says Josh Spencer, manager of the T. Rowe Price New Horizons fund. He sees Booz Allen as capable of generating 9% to 10% annual growth in revenue and yearly gains of 15% to 16% in earnings, in line with its historical performance. The stock is off 20% from its peak of $100, amid concerns about more restrained military spending. Spencer sees the pullback as a buying opportunity, with the stock valued at less than 20 times earnings.
J.B. Hunt Transport Services
(JBHT) is a leader in intermodal freight, which involves the fuel-efficient movement of trucks over rail lines. It has been one of the most successful trucking companies. Its stock has risen 30-fold over the past 20 years, to a recent $173. “It has an incredible franchise,” says Henry Ellenbogen, chief investment officer at Durable Capital Partners and a member of the Barron’s Roundtable.
J.B. Hunt’s relationship with the Burlington Northern Santa Fe railroad gives it a strong position in intermodal freight, he notes. J.B. Hunt also has a growing business taking over the trucking operations of smaller companies. And it is involved in digital freight brokerage—matching truckers with shipping customers.
Ellenbogen says the stock is reasonable at 22 times estimated 2022 profits, given a mid-teens annual growth outlook for earnings.
Marriott Vacations Worldwide
(VAC) is one of the top companies in the timeshare industry. It has 700,000 owners, a resilient business model with significant revenue from fees, and more exposure than its peers to luxury properties in places including Hawaii and Orlando, Fla.
“It has the best customer base, with the highest spending and an impeccable balance sheet,” says David Baron, a manager of the Baron Focused Growth fund. Marriott Vacations, whose shares recently were trading around $145, should reinstate its dividend later this year, he adds.
The shares, Baron argues, are cheap at a 11% free-cash-flow yield, based on 2022 estimates. He says that the stock, little changed since 2018, could produce 20% annual returns for shareholders in the coming years.
SiteOne Landscape Supply
(SITE) is the country’s top supplier of landscaping products, with ample opportunity to expand, given that it has just a 13% market share in a highly fragmented industry.
“It’s growing organically and has lots of acquisition opportunities,” says Columbia’s Cole, who considers the company to be capable of 10% to 15% annual revenue growth.
The stock, around $197, has a rich valuation, trading for 43 times projected 2022 earnings of $4.54 a share.
(STAA) has developed an implantable lens to correct myopia (nearsightedness). That addresses a potentially huge market, given the rising global incidence of that vision problem. The company expects the lens, which has been available in Europe and Asia for at least five years, to be on the U.S. market in the fourth quarter, pending Food and Drug Administration approval.
“It could do substantial volumes,’’ says Doug Brodie, a global manager at Baillie Gifford. “It’s early in a journey and is largely devoid of competition.”
Lenses for both eyes can be implanted in less than an hour, and they don’t involve the removal of the natural lenses. The wholesale cost in the U.S. could be around $1,000 per lens.
At a recent $138, Staar shares are richly valued at more than 20 times projected 2022 sales and 140 times estimated 2022 earnings. But the market opportunity is enormous: Some five billion people worldwide could have myopia by 2050.
(SFIX) has developed a subscription service for clothing, shoes, and other accessories and boasts over four million customers.
“This could be the Nordstrom of the future,” says Mario Cibelli, chief investment officer at Marathon Partners Equity Management, a Stitch Fix holder. “This a potentially huge market and nobody is addressing it in the same way.” Using a staff of 6,000 personal stylists and lots of data, Stitch Fix seeks to identify subscriber tastes to generate high satisfaction and limit returns on packages sent at intervals and determined by subscribers.
Its shares, around $44, are down 60% from their level earlier in the year, on investors’ worries about potential churn and the business’s ultimate profitability.
Yet Cibelli sees revenue growth of 20%-plus annually, opportunities outside its current U.S. and U.K. markets, and a potentially very profitable business in two to three years.
(TREX) is the top producer of a high-end wood alternative for decks that comes from 95% recycled material, making it an eco-friendly housing play. The shares, at $105, trade for 43 times projected 2022 earnings.
T. Rowe Price’s Spencer views Trex as worth the price, based on his view that it can generate sustainable annual revenue growth of 15% to 20%. Earnings are expected to climb by about 20% in 2022 and at a similar pace in the following years. “If you roll the clock forward three years, it doesn’t look as expensive,” he says.
(UPWK), an online marketplace for freelance workers, is favored by Baillie Gifford’s Brodie, who says it offers a play on the greater acceptance of freelancers by businesses.
The shares, recently around $44, aren’t cheap. Upwork is valued at $5.7 billion, or more than 10 times this year’s projected sales of nearly $500 million. It operates at a slight loss.
The investment case is about rapid sales growth leading to ample earnings. Sales are expected to rise by 30%-plus this year and 25% for 2022.
“Freelancers are more accepted by small to midsize business, but they’ve been frowned on by the HR departments at large businesses,” Brodie says. Upwork aims to change that perception by vetting its freelancers and by offering thousands of skill sets. “Upwork could become a trusted partner for an increasing number of enterprise-grade partners,” he says.
Write to Andrew Bary at firstname.lastname@example.org