In this article, we will discuss the 10 best high-margin growth stocks to buy now. If you want to explore similar growth stocks that have the ability to sustain and grow their profit margins, you can also take a look at the 5 Best High Margin Growth Stocks to Buy Now.
Growth stocks are getting hammered in 2022, with the tech-heavy Nasdaq Composite index crashing by 21.80% year-to-date and the S&P 500 Pure Growth falling by 20.45% year-to-date, as of August 23. Surging inflation and supply chain disruptions have strained companies’ earnings. The volatility in the stock market has left equity investors in panic and pessimism. However, some contrarian investors see the big tech selloff as a buying opportunity. To quote legendary investor Warren Buffett, “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”.
While growth stocks are risky investments right now and may look like they will go down further, investors can still realize strong returns if they invest in growth companies that have pricing power over peers due to their relative position in the industry or the nature of their products. A well-balanced portfolio consisting of both growth and value stocks can help investors manage risk and maximize their returns.
Billionaire investor Ken Fisher is renowned for his analyses and point of view on the capital markets. On June 29, Mr. Fisher recorded a video in which he explained how investors can navigate the current bear market and organize their portfolios for a rebound, which he sees happening in late 2022. Here is an excerpt from his video:
“Technology stocks are doing badly and have hurt overall growth because most of growth is technology. Here’s what I want you to see in a very very high correlation. Every day when the stock market falls value does better than growth and often when it falls a lot, by a lot. Every day when the market’s gone up, growth has done better than value, and when it’s gone up more, by a lot. That correlation is so high that it’s telling you something. It’s telling you that when we get to a bottom, we can come back to when that might be, but when we get to a bottom and the market starts to go back up, it will be growth that’s leading not value, and yet most people think they should be in value. So if you’re heavy in value now you’ve been doing relatively well compared to the market. You’re down but not down as much. You might want to switch out of that as you get to where we would have a bottom and move to growth because coming up the other side, that would tend to be true. Now it is normally true that coming off the bottom of bear markets the categories that have done the worst going down tend to do the best in the initial months and sometimes longer…
When we look at a period where we’ve gone into a bear market, meaning the market on a global peak has been down and crossed from 20% over into down a little more and therefore officially into a bear market. The time you’ve gotten to the absolute bottom of that bear market hasn’t been very long. The median time period of that is a month, and the mean average time period, that’s about double that…
For most bear markets, once you cross over that 20-percent-down mark and you’re officially in a bear market, it’s not very long until the bottom. Once you cross over that 20% line and when you look at 6, 12, 24, and 36-month periods looking into the future, returns are overwhelmingly positive and double digits so in each of those categories (Growth). Therefore if you’ve been oriented toward value now might be a good time to contemplate being more prone to growth. If you’ve been overweight to growth and tech you’re actually probably postured pretty well for the move that occurs on the other side…”
Industry-leading companies like Microsoft Corporation (NASDAQ:MSFT), Alphabet Inc. (NASDAQ:GOOG), and Apple Inc. (NASDAQ:AAPL) have the pricing power and ability to sustain, if not grow, their profit margin regardless of what cycle the economy is in.
Image by Tawanda Razika from Pixabay
Our Methodology
To determine the 10 best high-margin growth stocks to buy now, we looked at companies that have established business models and strong pricing power over peers, which should allow them to sustain and grow their profit margins, which measures how much profit a company makes per dollar of sales, after paying production costs.
We have ranked the following stocks in ascending order based on the number of shareholders from among the select group of hedge funds tracked by Insider Monkey’s database. We have mentioned the companies’ trailing twelve-month operating margin, as well as the analyst ratings and hedge fund sentiment surrounding each stock.
10 Best High Margin Growth Stocks to Buy Now
10. ASML Holding N.V. (NASDAQ:ASML)
Operating Margin: 32.17%
Number of Hedge Fund Holders: 47
ASML Holding N.V. (NASDAQ:ASML) develops, produces, sells, and services advanced semiconductor equipment systems consisting of lithography, metrology, and inspection-related systems for memory and logic chipmakers.
ASML Holding N.V. (NASDAQ:ASML) dominates the lithography market. The company’s extreme ultraviolet lithography systems are used by semiconductor giants such as Intel Corporation (NASDAQ:INTC) and Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) for semiconductor manufacturing. As of August 24, the stock has a trailing twelve-month operating margin of 32.2%.
On July 20, ASML Holding N.V. (NASDAQ:ASML) reported market-beating earnings for its fiscal second quarter of 2022. The company reported earnings per share of $3.60, outperforming expectations by $0.06. The company’s revenue for the quarter amounted to $5.53 billion, up 16.52% year-over-year, and beating the Wall Street consensus by $149 million.
On July 21, Deutsche Bank analyst Robert Sanders raised his price target on ASML Holding N.V. (NASDAQ:ASML) to EUR 525 ($523) from EUR 475 ($474) and reiterated a ‘Hold’ rating on the shares.
At the end of Q2 2022, 47 hedge funds were bullish on ASML Holding N.V. (NASDAQ:ASML), holding stakes worth $3.65 billion in the company. That is compared to 46 positions in the preceding quarter with stakes worth $5.04 billion. Fisher Asset Management raised its stakes in ASML Holding N.V. (NASDAQ:ASML) by 4% during Q2. The fund’s investment was valued at $2.18 billion on June 30 and accounted for 1.54% of Ken Fisher’s 13F portfolio value.
Here’s what ClearBridge Investments said about ASML Holding N.V. (NASDAQ:ASML) in its first-quarter 2022 investor letter:
“During the quarter, we reduced our semiconductor exposure through the trim of ASML (NASDAQ:ASML) to manage concerns of a slowdown due to the risk of double ordering and potential softness in some consumer end markets. We increased our position in IT services with the purchase of Accenture as we remain optimistic about the long-term growth potential these companies provide, which is underpinned by the compressed digital transformation cycle, rising cloud adoption and growth in data-driven insights.
Despite the market volatility and hyper-focus on rising rates, chief information officer surveys continue to forecast resilience in IT budgets this year. Growth in IT spending for 2022 is expected to remain above the 10-year pre-COVID-19 average, according to Morgan Stanley. We believe this is a result of the strong secular underpinnings brought on by digital transformation and businesses focusing on increasing efficiencies through technology.”
9. Micron Technology, Inc. (NASDAQ:MU)
Operating Margin: 34.51%
Number of Hedge Fund Holders: 69
Micron Technology, Inc. (NASDAQ:MU) is a leading semiconductor chipmaker that designs, manufactures, and sells memory and storage products worldwide. On August 9, Micron Technology, Inc. (NASDAQ:MU) announced that it plans to invest $40 billion by 2030 into building memory manufacturing plants in multiple phases in the United States. The company expects to begin production of its semiconductors in the second half of the decade.
On July 26, Micron Technology, Inc. (NASDAQ:MU) announced that it has begun volume production of its 232-layer NAND which delivers higher capacity and improved energy efficiency over previous generations of its NAND, enabling it to support the most data-intensive use cases, from client applications to cloud applications.
On August 10, Citi analyst Christopher Danely revised his price target on Micron Technology, Inc. (NASDAQ:MU) to $75 from $80 and reiterated a ‘Buy’ rating on the shares. Earlier this month, Deutsche Bank analyst Sidney Ho revised her price target on Micron Technology, Inc. (NASDAQ:MU) to $68 from $70 and also maintained a ‘Buy’ rating on the shares.
At the end of Q2 2022, 69 hedge funds were long Micron Technology, Inc. (NASDAQ:MU) and held stakes worth $2.16 billion, compared to 78 hedge funds with stakes worth $3.42 billion a quarter earlier. Matrix Capital Management owns 4 million shares of Micron Technology, Inc. (NASDAQ:MU) and is the leading shareholder in the company. The investment covers 5.01% of Matrix Capital Management’s 13F portfolio.
Like Microsoft Corporation (NASDAQ:MSFT), Alphabet Inc. (NASDAQ:GOOG), and Apple Inc. (NASDAQ:AAPL), Micron Technology, Inc. (NASDAQ:MU) has the ability to pass on rising costs to clients amid surging inflation and supply bottlenecks.
8. Oracle Corporation (NASDAQ:ORCL)
Operating Margin: 37.31%
Number of Hedge Fund Holders: 69
Oracle Corporation (NASDAQ:ORCL) is a leading provider of enterprise information technology services worldwide. The company is committed to expanding its operations around the globe. On July 14, Oracle Corporation (NASDAQ:ORCL) announced a strategic collaboration with Claro, a leading Mexican telecommunications company to jointly offer Oracle Cloud Infrastructure services to public and private sector organizations and enterprises in Colombia.
As of August 24, Oracle Corporation (NASDAQ:ORCL) shares offer a forward dividend yield of 1.68%, which the company supports with free cash flow of $5.02 billion. The company has a trailing twelve-month operating margin of 37.31%.
On August 11, Guggenheim analyst John DiFucci initiated coverage of Oracle Corporation (NASDAQ:ORCL) with a ‘Buy’ rating and $107 price target. The analyst noted that Oracle Corporation (NASDAQ:ORCL) began to see growth in its fiscal 2022 (ended May 31), driven by accelerating organic cloud revenue and database performance. The analyst sees the company maintaining high single-digit revenue growth and double-digit profit growth.
At the end of Q2 2022, 69 hedge funds were long Oracle Corporation (NASDAQ:ORCL) with stakes worth $4.18 billion, compared to 61 positions in the preceding quarter with stakes worth $4.33 billion. First Eagle Investment Management owns over 25.9 million shares of Oracle Corporation (NASDAQ:ORCL) as of June 30, making it the largest shareholder in the company.
Here is what Oakmark Funds had to say about Oracle Corporation (NASDAQ:ORCL) in its “Oakmark Fund” second-quarter 2022 investor letter:
“The sell-off in the enterprise software sector, combined with the complexity related to the acquisition of Cerner, provided an opportunity for us to re-establish a position in Oracle (NASDAQ:ORCL). Oracle is one of the world’s largest and most profitable software companies-generating more than $42 billion in revenue and 40% operating margins. We have always admired the stability of Oracle’s business and the strength of its customer relationships. Now, the company’s organic growth is beginning to accelerate. Specifically, total revenue grew 7% in fiscal year 2022 and 10% in the fourth fiscal quarter. In addition, management believes that Cerner’s growth and margins can be higher under Oracle’s ownership than it could on a standalone basis. Finally, we commend Oracle’s repurchase of roughly half its share base over the past decade, which has nearly doubled each remaining share’s interest in the business. Trading for only 12x calendar 2023 earnings ex-cash, we believe Oracle’s risk/reward is attractive.”
7. QUALCOMM, Incorporated (NASDAQ:QCOM)
Operating Margin: 35.82%
Number of Hedge Fund Holders: 71
On July 27, QUALCOMM Incorporated (NASDAQ:QCOM) reported its earnings for the company’s fiscal third quarter of 2022. The company reported earnings per share of $2.96 to outperform EPS estimates by $0.09. The company’s revenue for the quarter amounted to $10.9 billion, up 36.7% year-over-year, and beating expectations by $74.5 million.
QUALCOMM, Incorporated (NASDAQ:QCOM) dominates the market of android smartphones. Its Snapdragon processors power some of the most high-end devices on the market and with its industry-leading position, QUALCOMM, Incorporated (NASDAQ:QCOM) can effectively pass on higher prices to smartphone makers and sustain and even grow its profit margins. The stock is compelling at current levels. As of August 24, QUALCOMM Incorporated (NASDAQ:QCOM) is trading at a P/E multiple of 12.43x and its shares offer a forward dividend yield of 2.13%, which the company supports with free cash flow of $6.66 billion.
On July 28, Mizuho analyst Vijay Rakesh raised his price target on QUALCOMM, Incorporated (NASDAQ:QCOM) to $175 from $168 and reiterated a ‘Buy’ rating on the shares.
At the end of Q2 2022, 71 hedge funds held stakes in QUALCOMM Incorporated (NASDAQ:QCOM) worth $2.80 billion. 73 funds were long QCOM a quarter earlier, with stakes worth $3.55 billion. As of June 30, Alkeon Capital Management owns roughly 4.23 million shares of QUALCOMM Incorporated (NASDAQ:QCOM) and is the top shareholder in the company. The fund’s stake was valued at $541 million at the end of June.
6. Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM)
Operating Margin: 44.75%
Number of Hedge Fund Holders: 72
Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) manufactures, packages, tests, and sells integrated circuits and other semiconductor devices in Taiwan, China, Europe, the Middle East, Africa, Japan, the United States, and internationally. The company is a leader in the semiconductor industry and is a prominent supplier of semiconductor chips to tech giant Apple Inc. (NASDAQ:AAPL).
On July 12, Citi analyst Roland Shu reiterated his ‘Buy’ rating and NT$570 price target on Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM)’s Taipei-listed shares, which currently trade for NT$503.
On July 14, Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) announced its financial results for the fiscal second quarter of 2022. The company reported earnings per share of $1.55, beating estimates by $0.05. The company’s revenue came in at $17.8 billion, up 33.87% year-over-year, and beating the market consensus by $327 million. As of August 24, Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) shares boast a forward dividend yield of 2.28%, which is supported by the company’s free cash flow of $16.4 billion. The company has a trailing twelve-month operating margin of 44.75%.
At the end of Q2 2022, 72 hedge funds were bullish on Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) and held stakes worth $9.22 billion. 81 hedge funds were bullish on TSM in the previous quarter, with stakes worth $10.2 billion. Fisher Asset Management owns more than 26.3 million shares of Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) as of June 30, which amounts to a stake worth $2.15 billion, making it the largest shareholder in the company.
Here is what ClearBridge Investments had to say about Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) in its second-quarter 2022 investor letter:
“Disciplined selling is a key component of our risk-based approach, especially among companies with cyclical growth drivers. We have seen good success over the last several years from our semiconductor exposure but have been taking profits in companies such as, this quarter in Taiwan Semiconductor (NYSE:TSM) to reduce overall industry exposure. Given the exceptional sets of circumstances of semi shortages, double ordering and good growth in end market products including personal electronics and even data centers, we believe a neutral market position to this industry within the tech sector is appropriate.”
Companies that have been growing their operating margins for years and which have long track records of profitability include Microsoft Corporation (NASDAQ:MSFT), Alphabet Inc. (NASDAQ:GOOG), and Apple Inc. (NASDAQ:AAPL), which we’ll analyze in the second part of this article, linked to below.
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Disclosure: None. 10 Best High Margin Growth Stocks to Buy Now is originally published on Insider Monkey.
