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Growth stocks often demand sky-high valuations, which can make them risky to own in cases where expectations outpace reality. Minor issues can send growth stocks tumbling, putting investors on a stomach-churning roller-coaster ride.
Sometimes, the market doesn't give a growth stock enough credit or it punishes a growth stock too severely. In these cases, a quick double is well within the realm of possibility, as long as the company in question gets itself back on the right path. We asked three of our contributors to each discuss a growth stock that could give investors a 100% return. Here's what they had to say.
A rebound in the making?
Daniel Miller:One year ago, Restoration Hardware(NYSE: RH) was flying high after years of consistent stock price gains, trading just over $100 per share. But those years of consistent gains were wiped away within a couple months, leaving the company's stock price trading for only $34 per share and a forward price-to-earnings ratio below 15. The good news is this: if the recent quarter that topped expectations is any indication, then the company appears to be turning things around and could rebound or even double in the not-too-distant future.
Restoration Hardware is a luxury retailer that sells furniture, lighting, bath, home decor, and many other things. It generates nearly half of its revenue from direct-to-consumer business, which should enable the company to keep overhead lower than that of competitors focused solely on brick-and-mortar strategies.
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Unfortunately for investors, 2016 has been a turnaround year for the company as it focuses on improving its supply chain and inventory management. It's essentially sacrificed short-term financial results in favor of launching RH Modern and reducing its inventory. Restoration Hardware is also dealing with the question of when to recognize membership revenue, as it transitions from a promotional to a membership-based business model, all while moving its Source Book mailing from spring to fall.
As you can see in the graph above, Restoration Hardware's bottom line hasn't kept up with its top-line growth. However, if the company continues to improve its domestic operations and then expand them internationally, Restoration Hardware could be a big winner for patient investors. This potential growth comes at a risk, though. Much of its business will continue to be tied to the housing market, and any downturns could weigh on its performance.
This tiny biotech could deliver surprising growth
Sean Williams: The most intriguing growth stocks are sometimes found by examining under-the-radar small-cap stocks. One, in particular, that's caught my eye is small-cap drug developer Sucampo Pharmaceuticals (NASDAQ: SCMP).
Unlike most drug developers, Sucampo is profitable. The company's primary revenue comes from Amitiza, a chloride channel activator that acts within the small intestine to facilitate the passage of stool and alleviate the symptoms of chronic idiopathic constipation.
Modest organic growth of Amitiza has helped Sucampo, but a bigger influence was the company's acquisition of Japan's R-Tech Ueno for $275 million. The deal, completed last December, is immediately accretive and gives Sucampo a bigger piece of the Amitiza pie (R-Tech Ueno, Sucampo, and Takeda Pharmaceuticals entered a global licensing agreement for Amitiza in 2014). Furthermore, buying R-Tech Ueno should give Sucampo more control over the supply chain and manufacturing aspects of Amitiza. On a year-over-year basis, Sucampo's sales could climb by more than 30% this year.
Label expansion opportunities are another reason why Sucampo could shine. Amitiza is being studied as a constipation treatment for pediatric patients ages six to 17, as a functional constipation treatment in a separate study for children between the ages of six months and six years, and in an alternative formulation for patients who can't tolerate capsules. These additional indications aren't going to increase the patient pool as much as the adult indication approval did, but they could add a nice boost to the top and bottom lines.
After generating $0.95 in full-year earnings per share on $153 million in sales last year, Sucampo is on track to deliver a consensus $1.79 in full-year EPS on $274 million in sales by 2019 if all goes well. With its share price at just $12.56 as of Oct. 3,2016, there appears to be plenty of room for upside.
Risky, with a chance to double
Tim Green: Online furniture retailer Wayfair (NYSE: W) is growing fast. During the second quarter, revenue soared 60% year over year, the number of active customers jumped 65%, and average order value rose $33 to $258. Analysts expect the company to report $3.4 billion of revenue this year, a bit higher than its current market capitalization of $3.2 billion.
With Wayfair stock trading for less than projected annual sales, the market is being awfully pessimistic given the company's rate of growth. Doubling from here is a possibility, as long as Wayfair continues to grow at a breakneck pace. So far, there's been no sign that the company is slowing down.
While a double could be in the cards, Wayfair is a risky stock for a few reasons. The company has never turned a profit, posting a $48 million net loss during the second quarter alone. Fast-growing companies often spend heavily to drive growth, but there's no guarantee that Wayfair will ever reach sustainable profitability.
Wayfair spent $192 million on advertising through the first six months of the year, equating to 12.5% of revenue. Wayfair will never be profitable until it brings this spending down as a percentage of revenue. That will be easier said than done, given how competitive e-commerce can be. But if the company continues to grow quickly and shows progress keeping its costs in check, the stock could easily soar.
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Daniel Miller has no position in any stocks mentioned. Sean Williams has no position in any stocks mentioned. Timothy Green has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Wayfair. The Motley Fool recommends Restoration Hardware. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.