3 Growth Stocks for In-the-Know Investors

Markets Motley Fool

Fast-growing businesses can power fast-growing portfolios. That said, great growth stocks are often hidden among an assortment of potential ROI land mines. So we asked a handful of your fellow investors here at The Motley Fool to provide some guidance through that minefield. Read on to see why they expect Moody's (NYSE: MCO), HubSpot (NYSE: HUBS), and Oclaro (NASDAQ: OCLR) to deliver strong growth in the years ahead.

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The rising cloud-based marketing player

Chris Neiger (HubSpot): Unless you spend your working hours marketing content or trying to make online sales, then chances are, HubSpot isn't on your radar.

The company's cloud-based sales and marketing platform allows its customers to easily connect to their clients, generate leads, and create sales. HubSpot believes that the days of cold-calling and email blasts are over, and its customer growth and sales are proving that to be true.

HubSpot's customer base skyrocketed 47% year over year in the third quarter -- to 37,450 -- and the company's top line grew by 38% over the same period. What sweetens those numbers even more is that its average subscription revenue per customer is up to $10,332.

That's especially important because subscription revenue accounted for 95% of the company's total sales, and it grew by 40% in the most recent quarter.

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And let's not forget that HubSpot is making solid gains toward profitability as well. Non-GAAP earnings in Q3 were a modest $0.03 per share, but that was a big improvement from the loss of $0.05 per share the year before. And management is optimistic about HubSpot's full-year earnings potential, forecasting non-GAAP EPS of between $0.19 and $0.21, which would be a massive jump from its $0.36 per share loss in 2016.

HubSpot's explosive customer growth, top line increases, and expected earnings growth make this under-the-radar company a compelling opportunity for investors looking for fast-growing companies to add to their portfolios.

Earn a royalty on debt issuance

Jordan Wathen (Moody's): Corporate credit ratings and bond ratings are a necessary evil for companies that want to issue debt on favorable terms. Thus, the big three ratings agencies -- Moody's, S&P Global (NYSE: SPGI), and Fitch -- can charge hefty fees for providing the independent assessments of risk the market demands.

Moody's generates about 80% of its operating income from Moody's Investors Service, which provides credit ratings in exchange for up-front and ongoing fees. The remainder comes from Moody's Analytics, which generates recurring licensing fees for providing research, data, and software. The ratings business is the company's crown jewel, as it effectively earns a royalty on debt issued by companies, governments, and financial institutions.

As a service provider, Moody's expands via hiring, rather than making billion-dollar investments in property or equipment. As a result, Moody's can grow without continual investment, enabling it to pay out virtually all of its earnings in the form of dividends and share repurchases, which increases total shareholder returns.

The quality of Moody's ratings business is well known, and thus shares rarely trade inexpensively. But with the stock currently at about 23 times its midpoint EPS guidance for 2017, it's my view that shares are hardly overpriced for a company that can realistically grow earnings at a high-single digit rate annually over the long haul. Moody's is a growth stock to buy, hold, and ignore.

Short-term issues masking a long-term winner

Anders Bylund (Oclaro): The optical components maker's shares are on fire sale these days, and for all the wrong reasons. Warren Buffett recommends investing in wonderful businesses at fair prices, but Oclaro can give you a wonderful business at a wonderful price right now.

The company released its fiscal first-quarter results last week, and the report itself was good, but investors panicked over modest guidance for Q2. So Oclaro shares plunged 24% in a single day, due to choppiness in order flows from data-center customers and Chinese networking clients.

The price drop would have been justified if Oclaro's revenues and profits were headed down a deep, dark hole with no hope of recovery. That's not what's going on at all.

Oclaro's balance sheet is rock-solid, sporting $280 million of cash equivalents and no debt to speak of. Even the disappointing Q2 guidance points to solid profitability. The company is equipped to weather this storm and participate in the fiber-optic networking sector's fantastic long-term prospects. Telecoms all over the world are champing at the bit to roll out 5G wireless networks, which will require lots of fiber networking hardware to keep their towers connected to the telecommunications backbone.

The stock is trading at 7 times trailing earnings today. I see a company dug deep into the starting blocks, ready to sprint ahead to a fantastic rebound, and with a long runway of growth opportunities ahead of it.

10 stocks we like better than Moody's
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Anders Bylund has no position in any of the stocks mentioned. Chris Neiger has no position in any of the stocks mentioned. Jordan Wathen has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends HubSpot and Moody's. The Motley Fool has a disclosure policy.