We recently compiled a list of the 7 Unstoppable Growth Stocks To Buy Now. In this article, we are going to take a look at where Talen Energy Corporation (NASDAQ:TLN) stands among the unstoppable growth stocks to buy now.
Should You Invest in Growth Stocks with Rate Cuts Around the Corner?
Growth stocks are shares in a company whose earnings and sales are growing faster than other companies and are expected to continue to grow. These stocks rarely pay dividends as management is eager to reinvest earnings to fuel further growth.
However, with higher growth potential comes high risks. Moreover, it is challenging to find hidden growth stocks as they are typically new companies that are constantly seeking the next big innovation. We recently covered the 10 Best Aggressive Growth Stocks to Buy According to Hedge Funds, which talks about various approaches used to identify these stocks. Here’s an excerpt from the piece:
When it comes to identifying growth stocks, there are several approaches that are followed. These depend on the business model and the fundamentals of the firms being analyzed. For instance, for profitable companies with a positive net income, the price to earnings ratio is used. However, a large portion of high growth stocks aren’t profitable as they reinvest their revenue into expanding market share. This leads to high operating costs, and these firms are valued either through the EV/Sales or EV/EBITDA ratios, depending on whether the firm generates a positive operating income or not.
Both the P/E and other ratios tell us the premium that the market is placing over a firm’s ability to generate money. For instance, one of the major semiconductor companies in the world, which ranks 6th on our list of Top 10 Trending AI Stocks on Latest Analyst Ratings and News, had a P/E ratio of 112x by the end of Q1 2018. This was before the age of AI, and its two peers in the chip industry had 37x for the chip stock that’s Wall Street’s AI darling and 19x for the struggling American chip giant that’s also the only leading edge US based chip manufacturer. Safe to say, the 112x P/E foretold the story of times to come, and since Q1 2018, the stock has gained a whopping 1,386%.
The recent slowing down of the macroeconomic environment and the hype of return on investment of artificial intelligence have questioned the viability of investment in growth stocks. Analysts and portfolio managers have variable opinions but they all converge to a single point “diversification”.
On August 15, Ben Snider from Goldman Sachs appeared in a CNBC interview and mentioned that he still prefers growth stocks over value stocks but emphasized on diversified portfolios. He pointed out that the base case is not the economy running into recession, it is quite the opposite as the data suggests. Ben Snider believes that the economy continues to grow and backed his arguments by mentioning the second quarter earnings season growth, the S&P 500 growth, and the Federal Reserve rate cuts. Therefore the base case as per Snider is higher equity prices by the year end.
While elaborating on his statement about growth stocks, Ben Snider pointed out that an environment of slowing but healthy economic growth along with falling interest rates have historically supported growth stocks over value stocks.
Most importantly, Snider emphasized that there is a risk for some extremely large stocks both from a positioning point of view and from their inability to maintain very strong rates of growth. In addition, the AI bubble problem along with very high analyst expectations have priced these stocks to an extremely overvalued situation.
The solution, as presented by Snider, is to adopt a more diversified approach and go for a selection of smaller tech stocks along with other high-growth industries. Some of the major growth industries mentioned during the interview were smaller tech stocks, the healthcare industry, and some other European stocks that are on the verge of cutting-edge innovation.
Our Methodology
To compile the list of 7 unstoppable growth stocks to buy now, we used the Finviz stock screener. We set the performance filter to year-to-date +50% gain and sifted through some of the high-growth industries to get a consolidated list of stocks. We then selected the highest gainers that were the most popular among elite hedge funds. The list is ranked in ascending order of the year-to-date performance of stocks.
Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A portfolio manager wearing a suit and tie, looking at a graph representing the growth of the business development company.
Talen Energy Corporation (NASDAQ:TLN)
Year-to-date Share Price Gain as of September 11: 126.50%
Number of Hedge Fund Holders: N/A
Talen Energy Corporation (NASDAQ:TLN) is a leading power infrastructure company in the United States. It not only sells electricity but also sells the capacity to produce electricity and offers ancillary services, which support the stability and reliability of the electricity grid. It is also powering the AI revolution by providing clean energy to data centers.
The company is unique in terms of its low carbon emission production. Around 53% of the total energy generation of Talen Energy Corporation (NASDAQ:TLN) is carbon-free, indicating its green approach. This is a strong competitive advantage, especially with the recent rise in electricity demand due to AI and Data Center usage. With the increased demand for electricity, the environmental threats of huge-scale generation have become more prominent thus putting green power companies like Talen Energy Corporation (NASDAQ:TLN) at an edge.
It recently co-located a 1-gigawatt AWS data center campus near its Susquehanna nuclear plant. Amazon Web Services (AWS) is planning to set up a large data center in Pennsylvania, which will require 960 MW of power. Talen Energy Corporation (NASDAQ:TLN) will benefit from the data center as its nearby nuclear power plant will supply energy for the center. The $300 million escrowed portion of the Cumulus data center campus was released to the company marking the start of the development of the AWS campus.
Financially speaking the company posted a successful Q2 2024 and also raised its guidance. It generated $376 million in adjusted EBITDA and $165 million in free cash flow. Looking ahead, management expects EBITDA in the range of $720 million to $780 million (previous range $600 – $800 million) and adjusted free cash flow between $245 million and $285 million.
TLN is one of the unstoppable growth stocks to buy now. It has positioned itself to capitalize on the growing demand for clean energy to fuel data centers. The stock has soared 126.50% on a year-to-date basis.
Alluvial Capital Management stated the following regarding Talen Energy Corporation (NASDAQ:TLN) in its Q2 2024 investor letter:
“Talen Energy Corporation (NASDAQ:TLN) has had quite a year, selling off non-core power generation assets, buying back huge quantities of stock, and now listing on the NASDAQ. Talen is one of those too-rare cases where everything goes according to plan. The company is now enjoying a moment in the sun thanks to its ownership of a top-tier producer of reliable, low-carbon energy, the Susquehanna Steam Electric Station. So, what’s next? Talen will continue to sell off its legacy fossil fuel-burning power generation fleet and return excess capital to shareholders through buybacks. I still think the end game for Talen is a sale of the company once its less attractive assets are divested. Susquehanna, the nation’s sixth-largest nuclear facility with 2.5 gigawatts of power production capacity, is just too much of a prize to be held by a company of Talen’s size.”
Overall TLN ranks 3rd on our list of the unstoppable tech stocks to buy. While we acknowledge the potential of TLN as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for a promising AI stock that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure. None. This article was originally published on Insider Monkey.