Want to find a winning tech stock? Forbes’ America’s Fastest Growing Tech Companies is a good place to start.
Forbes’ list — which was released on June 5 and will appear in the magazine’s June 24 issue — is in its 11th year. According to Forbes, “Since 2003 a market-cap-weighted basket of each year’s Fast Tech 25 has beaten the Nasdaq, often by a wide margin, except in 2005, 2006 and this past year.”
The inclusion criteria:
Market cap of at least $500 million
Annual revenue of at least $150 million
Sales growth of at least 10% for each of the past three fiscal years and over the past twelve months
Estimated earnings growth more than 10% over the next three to five years
Forbes ranks its list by average 3-year sales growth. Its top five are LinkedIn Corp (NYSE:LNKD), Facebook Inc (NASDAQ:FB), Apple Inc. (NASDAQ:AAPL), 3D Systems Corporation (NYSE:DDD), and IPG Photonics Corporation (NASDAQ:IPGP). I’m going to rank another way.
Top 5 by estimated earnings growth
Earnings growth — cash flow from earnings, actually – is what drives a stock price up over the long-term. So, let’s sort Forbes’ list by estimated EPS growth.
| Rank | Company | Business | Est. EPS Growth | 12 Mo. Sales Growth | 3-Yr Avg Sales Growth |
|---|---|---|---|---|---|
| 1 | Social Networking | 51% | 80% | 102% | |
| 2 | 3D Systems | 3D Printers | 30% | 45% | 46% |
| 3 | Equinix | Data Center Services | 29% | 17% | 29% |
| 4 | athenahealth | Cloud-based Healthcare Services | 27% | 29% | 31% |
| 5 | IPG Photonics | Lasers/Amplifiers | 26% | 17% | 46% |
Source: Forbes
Valuations
Valuation matters. So, let’s take a look at PE’s and 5-year PEG’s for the companies on my list. The companies are listed by estimated EPS growth.
| Rank | Company | Est. EPS Growth | PE (ttm) | PE (frw) | 5-Yr PEG |
|---|---|---|---|---|---|
| 1 | 51% | 701 | 86 | 2.1 | |
| 2 | 3D Systems | 30% | 104 | 35.8 | 2.2 |
| 3 | Equinix | 29% | 64 | 40.5 | 2.9 |
| 4 | athenahealth | 27% | 202 | 60.4 | 3.0 |
| 5 | IPG Photonics | 26% | 22 | 17.3 | 0.8 |
Source: Yahoo! Finance; data to June 19
Stocks to consider
Here’s the rationale for honing in on the three I’m highlighting:
LinkedIn – It has the top 1- and 3-year revenue growths, and the top 3-5 year estimated EPS growth. It provides services that are needed in good and bad economic times.
3D Systems – It ranks high on both 1- and 3-year revenue growth; 1-year revenue growth is roughly the same as the 3-year, and its estimated EPS growth is the second highest. It’s involved in an emerging and disruptive technology.
IPG Photonics – It ranks high on the estimated EPS growth list and is reasonably valued. I view the medical niche favorably.
This isn’t to say the others on Forbes’ list — notably, tech powerhouse Google Inc (NASDAQ:GOOG) — aren’t worth a look.
LinkedIn Corp (NYSE:LNKD) is a professional networking site that provides a valuable resource in all economic climates. There’s more unemployment and job hunting in bad times, and more job-hopping and employers hiring in good times.
LinkedIn Corp (NYSE:LNKD) is often compared to Facebook Inc (NASDAQ:FB) and other sites used for social reasons. It’s quite a different beast, in my opinion. Firstly, its revenue is not ad-driven, as is Facebook Inc (NASDAQ:FB)’s–only 23% of LinkedIn Corp (NYSE:LNKD)’s Q1 2013 revenue came from ads. This is a service people (heavily employers, as “hiring solutions” accounts for 57% of revenue) are willing to pay for. Secondly, it’s less subject to fickleness, as there’s no “cool” factor needed. Thirdly, there are no even “kinda” substitutes.
There’s no doubt the stock is pricey. The trailing PE is gargantuan — but I don’t think investors should concern themselves much with backward-looking metrics. Yes, the forward-looking valuation measures are also high. However, this is almost always going to be the case for growth stocks with considerable future earnings’ potential.
Foolish writers Pam Peerce-Landers and John Reeves just released a wonderfully thorough and easy-to-follow “The Bull vs. Bear Case for LinkedIn” slideshow. I encourage existing and potential investors to take a look. One comment: while I agree the U.S. market is likely nearly saturated, there are other developed markets that are not.
3D Systems
The company is involved in a disruptive technology. It’s the only one of the three 3-D printer manufacturers trading on major U.S. exchanges (Stratasys, Ltd. (NASDAQ:SSYS) and The ExOne Company are the others) that’s currently profitable. Estimated EPS growth rates for next year and the next 5 years are 24% and 16.5%, respectively. With a 2.2 5-year PEG, the stock is pricey. However, the company has exceeded past estimates. If it does so going forward, the PEG will prove overstated.
Those interested in investing in the 3-D printing realm should also consider Stratasys, Ltd. (NASDAQ:SSYS). It’s more heavily focused on commercial printers. However, its consumer offerings just expanded with the June 19 announcement that it’s acquiring privately-held and very popular MakerBot. Stratasys, Ltd. (NASDAQ:SSYS)’ estimated EPS growth rates for next year and the next 5 years are 29% and 30.5%, respectively. Its forward P/E and 5-year PEG are 35 and 1.4, respectively. The PEG suggests it’s more reasonably valued than 3D Systems Corporation (NYSE:DDD).
IPG Photonics
IPG Photonics Corporation (NASDAQ:IPGP) develops and manufactures fiber lasers, fiber amplifiers, and diode lasers. Its products are used in a wide range of industrial applications, such as materials processing, laser-assisted machining, surface treatment, drilling, and rapid prototyping. It also produces fiber and diode lasers for medical use.
Its 5-year PEG suggests it may be undervalued. Given the company’s business and other metrics, it does seem we’re dealing with an undervalued company, not a value trap.
It has fat margins: operating and net profit margins are 36.6% and 25.9%, respectively, for the trailing twelve months. It has nearly no debt. Its ROE is 20%, solid since it’s not debt-inflated. Another positive is the high insider-ownership (18%).
Its most recent quarterly results (revenue up 15%, EPS up 10%) caused the stock price to drop, given the margin contraction. I agree with Foolish writer Brian Stoffel’s take: “The company said it was offering its lasers at lower price points to drive up adoption rates. Long-term, I think that’s a very smart move for the company, as it’s likely to win market share that will boost earnings in the years to come.”
Negatively, the stock has a high short interest (23%) and beta (1.7). So, it’s likely to be volatile.
Foolish bottom line
Earnings growth drives stock prices over the long-term. And the best earnings growth comes from revenue growth, as earnings growth based upon expense reduction can only go so far. Thus, Forbes’ America’s Fastest Growing Tech Companies and other such lists that highlight companies with strong revenue and earnings growth make good potential pools from which to find winning stocks.
The article Looking for a Tech Stock? Check Out Forbes’ “Fastest Growing Tech Companies” originally appeared on Fool.com and is written by BA McKenna.
BA McKenna has no position in any stocks mentioned. The Motley Fool recommends 3D Systems, IPG Photonics, LinkedIn, and Stratasys. The Motley Fool owns shares of 3D Systems, IPG Photonics, LinkedIn, and Stratasys and has the following options: Short Jan 2014 $36 Calls on 3D Systems and Short Jan 2014 $20 Puts on 3D Systems. BA is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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