With Wall Street celebrating a bull market after a tremendous rally this year, it is essential to consider the opportunities ahead. The trending growth names are up quite a lot, and even with the bullish sentiment gaining even more momentum, I do not see them offering much upside potential here.
However, this sentiment change will benefit high-growth companies that aren’t too focused on profitability. Such companies faced hefty selloffs for nearly the last two years and continued to be buried this year while trendy sectors like artificial intelligence and cloud computing surged. But with institutional investors, who form the vast majority of the stock market’s trading volume, being bullish, it is prime time to invest in such high-growth names.
As a side note, high growth and low profits do not mean these companies are unsustainable. Instead, these businesses have not shifted gears during the storm and continued to capture market share while building growth momentum.
Let’s dive into the top growth stock picks:
Xponential Fitness (XPOF)
Xponential Fitness (NYSE:XPOF) took a beating in May and is down nearly 24% so far. As the name implies, this boutique fitness franchisor owns ten leading vertical brands, such as Club Pilates, Pure Barre and BFT. It sells licenses to entrepreneurs who operate the studios and pay royalties to Xponential.
This business model has been working wonderfully, with sales growing at 42% year-over-year as of Q1. The company opened 115 new studios, sold 188 franchise licenses in the last quarter, and raised its full-year 2023 outlook. Xponential Fitness expects to end 2023 with “sales, revenue and Adjusted EBITDA at +33%, +20% and +40% [growth], respectively, year-over-year at the midpoint of guidance.”
Indeed, the growth is slowing down, but analysts estimate this growth to stay strong near the ~20% range through 2025. If fitness trends evolve by then, I can see this metric being much higher. Some concerns about profits and cash remain, but those can also be refuted by the fact that this business will be profit-generating this year.
Furthermore, Wall Street analysts are heavily bullish here on this being one of the top growth stock picks. The average price target of $38.9 implies a hefty 55% upside potential in one year.
Dana (NYSE:DAN) is a leading supplier of electric propulsion systems and powertrains for vehicles. It partners with major automakers and is a dual play on both the emerging electric vehicle market and the auto parts sector.
The stock offers immense value in this range, down 40% since April last year, pricing in all the concerns about its profitability. Indeed, many would still complain that the forward price-to-earnings ratio here is 30 times. But I’d argue that is offset by the price-to-sales ratio of 0.21 times, outperforming 84.7% of its peers. Better, analyst estimates put EPS growth at 95% on average for 2023 and 2024, respectively. For 2025, it would still grow at a healthy 36.2%, while sales growth is expected to reaccelerate to 6.74%. Thus, I see a lot of long-term value here.
There is also the EV sector at play here. Dana could become one of the leading car parts providers for many emerging EV names. Deep Tech Insights from SeekingAlpha points out that it already supplies “…the electric drive unit for the Ferrari SF90 Stradale and the battery cooling system for the Ford F-150 lightning.”
DAN stock also has a 2.7% dividend yield as a sweetener, though I don’t see this increasing too much in the future.
Cal-Maine Foods (CALM)
Cal-Maine Foods (NASDAQ:CALM) is the largest producer and marketer of shell eggs in the U.S. It sells conventional, cage-free, organic and specialty eggs to customers nationwide. It aims to be a low-cost provider and expand its cage-free production to meet growing demand and legal requirements. The company was hit by a downgrade from Stephens two months ago and subsequently plunged 20% from its March-end close.
There’s not a lot of Wall Street coverage on this stock, with only three ratings in the last six months per TipRanks. But I believe this company will be high on the agenda once the valuation gets less blurry.
Sure, “eggflation” will cause sales to tumble by around 30% next year after a 78% growth this year, and earnings will decline substantially. But earnings will remain much higher than 2022 levels, and so will revenue. Not to say that this stock is already trading at a forward P/E ratio below 3 times with a staggering dividend yield of 18.14%. There’s also zero debt here to worry about.
Overall, there is little near-term downside risk here, with substantial long-term potential for more appreciation. Bird flu is expected to calm down, and bird feed prices will readjust in the next two years. On the list of top growth stock picks, CALM now is an excellent opportunity before that happens.
On the date of publication, Omor Ibne Ehsan did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.