In this article, we will take a look at the 12 high growth high margin stocks to buy. To skip our analysis of the recent trends, and market activity, you can go directly to see the 5 High Growth High Margin Stocks to Buy.
Profit margins tend to fluctuate based on several factors which can lead to two types of higher than average margins: temporary margins caused by external factors, and competitive advantages which stem from the intrinsic company and firm-specific factors. A prime example of temporarily high margins can be the above average margins for the oil and gas industry in times of high oil prices, or a company that has hit upon a new opportunity given a new market or a new technological development.
On the other hand, competitive advantages require time to be developed and honed and require excellence ranging from product development to strategy execution and marketing and distribution. Generally, maintaining substantially higher than average margins in the long term is difficult given competition. To identify such companies that have exhibited strong margins and high growth in the past, we filtered out companies that had EPS Growth for Past 5 Years lower than 10%. In addition, we went through our list and identified companies with competitive advantages going forward.
The United States stocks market continues to rally with optimism related to interest rates. Investor confidence has been on an upward trajectory since the end of October following optimism about interest rates policies. On November 28, Fed Governor Christopher Waller said that he’s “increasingly confident” that the monetary policy is in the right place to bring inflation down to 2%. Major stock indices have posted consecutive weeks of positive performance with the S&P 500 slated to have one of its best months since July 2022. You can read more about the recent interest rate cuts which have led to the latest rally in the stock markets here.
We have discussed high growth, high margin stocks in this article which are available at attractive prices and present promising opportunities for investment. A combination of high growth and high margins is a coveted combination among investors as it holds the potential for significant growth in the future with low risk profiles.
For the purpose of our article, we have chosen EPS growth as the main factor to identify high growth stocks, from a myriad of possible metrics that could have been chosen, such as revenue growth, EBITDA growth, etc. For this article, we define high growth as a company where analysts expect the company to grow its EPS by an average annual rate of at least 15% over the next 5 years.
In terms of high margin, we have opted to employ net profit margins as the main criteria for selection of high margin stocks. The average profit margin can vary from time to time but is generally considered around 10% give or take several percentage points. For the stocks listed in this article, we define companies with profit margins of over 20% as having high margin. We have chosen net profit margin instead of other margins such as gross margins, and operating margins, as they provide a more accurate picture of the profitability of a company and accounts for all the expenses including taxes, interests, depreciation, as well as stock-based compensations.
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Methodology
We first identified leading large cap companies with profit margins higher than 20% and EPS Next 5 Year Ratio higher than 15% according to FINVIZ.com. We also removed stocks that had EPS Growth for Past 5 Years lower than 10% to maintain quality stocks with high growth in the past.
From the remaining stocks on our list, we picked the 12 stocks with competitive advantages and have ranked them based on their EPS Next 5 Year Ratios.
For each stock, we have also mentioned hedge fund sentiment. Data from around 900 elite hedge funds tracked by Insider Monkey in the third quarter of 2023 was used to identify the number of hedge funds that hold stakes in each firm. Hedge funds’ top 10 consensus stock picks outperformed the S&P 500 Index by more than 140 percentage points over the last 10 years (see the details here). That’s why we pay very close attention to this often-ignored indicator.
12. Microsoft Corporation (NASDAQ:MSFT)
EPS Next 5 Year Ratio According to FINVIZ.com: 15.42%
Profit Margin According to FINVIZ.com: 35.31%
Number of Hedge Fund Holders: 306
Redmond, Washington-based Microsoft Corporation (NASDAQ:MSFT) is a leading technology company with products include operating systems, cross-device productivity applications, server applications, business solution applications, desktop and server management tools, software development tools, and video games.
Microsoft Corporation (NASDAQ:MSFT) is among the leaders in the AI race following its partnership with OpenAI, the creator of Chat GPT – an artificial intelligence powered chatbot. The company is using its AI capabilities to improve its existing products and services including Bing Search, Cloud, as well as its Office Suite.
In its Baron Technology Fund Q3 2023 investor letter, Baron Funds, an investment management company, made the following comments about Microsoft Corporation (NASDAQ:MSFT):
“Looking at the big picture, Microsoft continues to execute at a high level, navigating a challenging macro backdrop while aggressively investing in long-term growth, and we remain confident that Microsoft is well positioned to leverage AI over the medium to long term as it infuses Open AI and other generative AI technologies across its entire product portfolio.”
As of Q3 2023, Microsoft Corporation (NASDAQ:MSFT) ranks highest on our list of 12 high growth high margin stocks to buy in terms of hedge fund sentiment. It was the most sought-after stock among the 910 hedge funds tracked by Insider Monkey as 306 of these hedge funds held its shares valued at $72 billion.
11. Intuitive Surgical, Inc. (NASDAQ:ISRG)
EPS Next 5 Year Ratio According to FINVIZ.com: 15.66%
Profit Margin According to FINVIZ.com: 22.14%
Number of Hedge Fund Holders: 78
Sunnyvale, California-based Intuitive Surgical, Inc. (NASDAQ:ISRG) is a global technology leader in minimally invasive care and the pioneer of robotic-assisted surgery and develops, manufactures, and markets the da Vinci surgical system.
On October 19, Intuitive Surgical, Inc. (NASDAQ:ISRG) released its financial results for Q3 2023. Its revenues increased by 12% y-o-y to $1.7 billion, while it reported a net income of $416 million. It generated a normalized EPS of $1.46, which exceeded consensus estimates by $0.04.
On November 17, Stifel analyst Rick Wise raised the price target for Intuitive Surgical, Inc. (NASDAQ:ISRG) shares to $350 from $315 and maintained a ‘Buy’ rating.
As of Q3 2023, 21 of the billionaires tracked by Insider Monkey owned Intuitive Surgical, Inc. (NASDAQ:ISRG) shares worth $3.1 billion. Ken Fisher’s Fisher Asset Management was the largest shareholder with ownership of 4.4 million shares valued at $1.3 billion.
10. Public Storage (NYSE:PSA)
EPS Next 5 Year Ratio According to FINVIZ.com: 17.00%
Profit Margin According to FINVIZ.com: 43.22%
Number of Hedge Fund Holders: 24
Glendale, California-based Public Storage (NYSE:PSA) is the world’s largest owner, operator, and developer of self-storage facilities. It operates more than 3,000 facilities across the United States serving nearly two million customers.
On November 8, Public Storage (NYSE:PSA) announced a regular common quarterly dividend of $3.00 per common share. The annualized regular dividend of the company translates to a dividend yield of 4.08% based on the share price on December 21.
Public Storage (NYSE:PSA) is the only stock on our list of 12 high growth high margin stocks to buy that belongs to the real estate sector. As of Q3 2023, its shares were held by 24 of the 910 hedge funds tracked by Insider Monkey, valued at $147 million. Jeffrey Furber’s AEW Capital Management was the largest shareholder on record with ownership of 0.33 million shares valued at $86 million.
In its Q3 2023 “Baron Real Estate Income Fund” investor letter, Baron Funds, an investment management firm, made the following comments about Public Storage (NYSE:PSA):
“Public Storage’s nearly 2,500 self-storage facilities across the U.S. serve more than one million customers. The company has achieved the #1 market position in 14 of its top 15 markets. Despite our near-term caution, we are optimistic about the company’s long-term prospects due to our expectations for strong occupancy, limited new supply, the resumption of solid long-term organic cash-flow growth, and the potential for M&A due to its well-capitalized and low leveraged balance sheet and its ability to increase rents monthly to offset inflation headwinds. We believe Public Storage’s shares are currently valued at a discount to private market self-storage values.”
9. Cadence Design Systems, Inc. (NASDAQ:CDNS)
EPS Next 5 Year Ratio According to FINVIZ.com: 17.95%
Profit Margin According to FINVIZ.com: 24.42%
Number of Hedge Fund Holders: 58
San Jose, California-based Cadence Design Systems, Inc. (NASDAQ:CDNS) is a leader in electronic systems design using its Intelligent System Design™ strategy to deliver computational software, hardware, and IP. It offers software, hardware, services, and reusable IC design blocks to its customers.
On November 2, Cadence Design Systems, Inc. (NASDAQ:CDNS) announced the new Cadence® Voltus™ InsightAI, the industry’s first generative AI technology that identifies the root cause of EM-IR drop violations early in the design process and selects and implements the most efficient fixes to improve power, performance, and area (PPA).
As of Q3 2023, 58 prominent hedge funds owned Cadence Design Systems, Inc. (NASDAQ:CDNS) shares valued at a combined total of $2.9 billion. Arrowstreet Capital was the leading hedge fund shareholder, followed by Alkeon Capital Management and Viking Global.
Like other stocks such as Booking Holdings Inc. (NASDAQ:BKNG), Alphabet Inc. (NASDAQ:GOOGL), and Microsoft Corporation (NASDAQ:MSFT), Cadence Design Systems, Inc. (NASDAQ:CDNS) is among the 12 high growth high margin stocks to buy.
8. Synopsys, Inc. (NASDAQ:SNPS)
EPS Next 5 Year Ratio According to FINVIZ.com: 18.07%
Profit Margin According to FINVIZ.com: 21.01%
Number of Hedge Fund Holders: 57
Sunnyvale, California-based Synopsys, Inc. (NASDAQ:SNPS) is an electronic design automation company with a focus on advanced tools for silicon chip design, verification, IP integration, and application security testing.
On August 23, Synopsys, Inc. (NASDAQ:SNPS) announced the acquisition of PikeTec GmbH, a leading solutions provider for the testing and verification of automotive software for control unit systems. Terms of the transaction were not disclosed.
As of Q3 2023, Synopsys, Inc. (NASDAQ:SNPS) shares were owned by 57 hedge funds with a total value of $2.6 billion. Rajiv Jain’s GQG Partners was the largest hedge fund shareholder with ownership of 1.1 million shares valued at $511 million.
In its Q3 2023 investor letter, Aristotle Atlantic Partners, LLC, an investment advisor, made the following comments about Synopsys, Inc. (NASDAQ:SNPS):
“Synopsys contributed to performance in the quarter as the company reported third quarter revenues that were above consensus, additionally the company raised fiscal year guidance for 2023. Synopsys continues to be a key beneficiary from the demand for semiconductors throughout the entire economy, as well as the increasing complexity of semiconductor design, particularly for silicon used in the artificial intelligence (AI) technology stack. The company is also leveraging AI for its design tools which can drive increased usage and improve margins for the company’s tools.”
7. Arista Networks, Inc. (NYSE:ANET)
EPS Next 5 Year Ratio According to FINVIZ.com: 19.40%
Profit Margin According to FINVIZ.com: 33.97%
Number of Hedge Fund Holders: 59
Based in Santa Clara, California, Arista Networks, Inc. (NYSE:ANET) is an industry leader in data-driven, client-to-cloud networking for large data centers, campuses, and routing environments. It delivers availability, agility, automation, analytics, and security through an advanced network operating stack.
On November 10, Goldman Sachs analyst Mike Burton raised the price target on Arista Networks, Inc. (NYSE:ANET) shares to $248 from $223 and maintained a ‘Buy’ rating for the shares. The target price increase followed a strong quarterly earnings release which showed a normalized EPS of $1.83, $0.25 more than the consensus estimates.
According to the Insider Monkey data on 910 leading hedge funds, 59 hedge funds were long Arista Networks, Inc. (NYSE:ANET) shares as of Q3 2023. Steve Cohen’s Point72 Asset Management was the largest hedge fund shareholder with ownership of 1.7 million shares valued at $314 million.
6. Alphabet Inc. (NASDAQ:GOOGL)
EPS Next 5 Year Ratio According to FINVIZ.com: 19.48%
Profit Margin According to FINVIZ.com: 22.52%
Number of Hedge Fund Holders: 221
Alphabet Inc. (NASDAQ:GOOGL), based in Mountain View, California, is the parent company of several companies including Google, Verily Life Sciences, GV (formerly Google Ventures), Calico, and X-the moonshot factory. Majority of its revenue is generated by Google Services which comprises of ads, Android, Chrome, hardware, Gmail, Google Drive, Google Maps, Google Photos, Google Play, Search, and YouTube.
On December 7, Roth MKM analyst Rohit Kulkarni raised the price target for Alphabet Inc. (NASDAQ:GOOGL) shares to $166 from $152 and maintained a ‘Buy’ rating. The target price represents a potential upside of 21.50% based on the share price on December 18.
This is what Wedgewood Partners, an investment management company, had to say about Alphabet Inc. (NASDAQ:GOOGL) in its Q3 2023 investor letter:
“Alphabet was a top contributor to performance as search revenues accelerated during their second quarter. This improved performance flies in the face of fears that demand for the Company’s advertising inventory and core search functionality would be diluted by the Company’s own generative-AI offerings and outside substitutes. Alphabet subsidiaries have been at the vanguard of artificial intelligence for more than a decade. The Company has spent almost $150 billion on research and development over just the past five years, and today over 80% of the Company’s advertising customers use an AI-enabled tool when they run their Google Search and YouTube campaigns. Thus, Alphabet is certainly not “behind the curve” in any way, shape, or form when it comes to AI. Quite the contrary, the Company has ample room to rationalize spending to drive better returns on investments and increase capital returns to shareholders at these relatively attractive forward earnings multiples.”
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Disclosure: None. 12 High Growth High Margin Stocks to Buy is originally published on Insider Monkey.
