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. That said, here are two growth stocks expanding their competitive advantages and one climbing an uphill battle.
One Growth Stock to Sell:
International Paper (IP)
One-Year Revenue Growth: +25.5%
Established in 1898, International Paper (NYSE:IP) produces containerboard, pulp, paper, and materials used in packaging and printing applications.
Why Is IP Risky?
- The company has faced growth challenges as its 3.9% annual revenue increases over the last five years fell short of other industrials companies
- Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 15.5% annually
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
International Paper is trading at $31.89 per share, or 18.2x forward P/E. To fully understand why you should be careful with IP, check out our full research report (it’s free).
Two Growth Stocks to Watch:
Alignment Healthcare (ALHC)
One-Year Revenue Growth: +41.8%
Founded in 2013 with a mission to transform healthcare for seniors, Alignment Healthcare (NASDAQ:ALHC) provides Medicare Advantage health plans for seniors with features like concierge services, transportation benefits, and technology-driven care coordination.
Why Is ALHC a Top Pick?
- Annual revenue growth of 45.4% over the past two years was outstanding, reflecting market share gains this cycle
- Earnings per share have massively outperformed its peers over the last four years, increasing by 28.5% annually
- Free cash flow margin jumped by 11 percentage points over the last five years, giving the company more resources to pursue growth initiatives, repurchase shares, or pay dividends
Alignment Healthcare’s stock price of $18.45 implies a valuation ratio of 21.8x forward EV-to-EBITDA. Is now the time to initiate a position? Find out in our full research report, it’s free.
CNX Resources (CNX)
One-Year Revenue Growth: +16.8%
Tracing back to operations that began in 1860, CNX Resources (NYSE:CNX) drills for and produces natural gas from underground shale formations in Pennsylvania, Ohio, and West Virginia.
Why Do We Like CNX?
- Highly-profitable operating model results in strong unit economics and a top-tier gross margin of 68.1%
- EBITDA margin improvement of 1 percentage points over the last five years demonstrates its ability to scale efficiently
- Robust free cash flow margin of 23.3% gives it many options for capital deployment
At $38.02 per share, CNX Resources trades at 13.5x forward P/E. Is now the right time to buy? See for yourself in our full research report, it’s free.
High-Quality Stocks for All Market Conditions
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