Growth stocks can build your personal wealth quickly -- but they are a virtual minefield full of overpriced stocks and short-lived trends. With that in mind, we asked a handful of Motley Fool investors for some guidance through this tempting, but dangerous, high-growth investing terrain to help you avoid common pitfalls and maximize your long-term returns. Read on to see why they recommend private-label credit card issuer Synchrony Financial (NYSE: SYF), video game developer Activision Blizzard (NASDAQ: ATVI), and in-flight broadband service-provider Gogo (NASDAQ: GOGO).
A lender in the right places
Jordan Wathen (Synchrony Financial): Lenders rarely make the list of growth stocks, given their growth is constrained by their balance sheets. Synchrony, however, may be one to study more closely.
Synchrony Financial primarily generates its revenue and profit by partnering with retailers to provide services, including private-label credit cards. Synchrony backs many of the credit cards and loans issued by major retailers including Lowe's and Wal-Mart. The company has experienced a slight uptick in credit losses as consumer credit losses normalize, but investors are letting shares trade too cheaply.
Synchrony Financial's strength is that its private-label cards -- its largest business -- enable retailers to avoid costly credit card swipe fees, collect more information about each customer, and generate an additional source of income when financing profits are split between Synchrony and the retailer. You can imagine that its pitch is only more compelling today, as retailers grapple with slower sales and constrained balance sheets.
The company currently trades for about 11 times earnings and about two times tangible book value, making it a great candidate as a stock that offers growth at a reasonable price.
Final boarding call: In-flight broadband services are taking off
Anders Bylund (Gogo): Broadband internet connections have become a standard part of everyday life. If you're getting a fast and reliable data connection aboard an airliner, you're probably using the products and services of Gogo.
The company provides in-flight data services based on a combination of land-based tower networks in North America and satellite signals around the world. These fast connections are then distributed inside the flight cabin via the same Wi-Fi technologies you use every day. Gogo doesn't launch satellites of its own, but leases signal services from specialized providers in that area.
Business is booming. Gogo's revenues have increased by an annual average of 22% in the last five years while adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) profits rose from $49 million to $162 million.
The company is rolling out a new generation of satellite and tower services that should give both of these metrics a boost in 2018 and beyond. So far, Gogo serves approximately 2,800 aircraft in North America and 320 planes in the rest of the world. When you compare the American inventory of roughly 7,100 commercial aircraft and 22,500 jetliners around the world, it's clear that Gogo's business plan has room to grow.
But the market hasn't quite caught on to Gogo's strong growth prospects yet. Share prices have only increased by 18% over the last year, barely keeping pace with the S&P 500 market barometer. In the four years since Gogo's IPO, the stock has lost 12% of its value, and investors missed out on a 57% growth spurt in the broader stock market. 2016 was a downright disastrous year for Gogo's shareholders.
That's about to change. Gogo's service upgrades and the economies of scale from a larger customer base will lead to positive free cash flows in 2019, unlocking a matching growth surge in share prices and investor returns. What looks like a sleepy and unprofitable stock today is about to turn into a hungry growth monster in short order.
A next-generation entertainment company
Keith Noonan (Activision Blizzard): Activision Blizzard's shares are up over 450% over the last five years and trading at roughly 31 times forward earnings estimates, so its valuation might look too frothy. However, I think a closer examination suggests that the leading video game publisher still has what it takes to make good on its premium valuation and deliver big wins for investors. While the company's earnings multiple looks steep, it has a forward price-to-earnings-growth (PEG) ratio of less than 0.5 -- a PEG of less than 1 is often considered to be an indication that the stock is undervalued -- and avenues to continued momentum.
Activision Bizzard is poised to continue benefiting from the shift of video game sales away from retail chains like GameStop and toward a direct-to-consumer model, increased spending on high-margin downloadable content, and a range of other exciting growth opportunities. The company recently launched a consumer-products division that has huge potential. It also is making a push into original television and film content development and looks poised to be a leader in emerging categories including esports and mixed reality.
On the heels of its acquisition of Candy Crush Saga developer King Digital, Activision's just getting started in the mobile games space -- with plans to bring hit properties like Call of Duty to smartphones and tablets and increase its ad-based revenues in the space.
Activision boasts a stable of blockbuster entertainment franchises and some of the best development studios in an industry that still has substantial room for expansion. As a result, its growth story is just getting started.
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Anders Bylund has no position in any of the stocks mentioned. Jordan Wathen has no position in any of the stocks mentioned. Keith Noonan owns shares of Activision Blizzard. The Motley Fool owns shares of and recommends Activision Blizzard. The Motley Fool recommends Lowe's and Synchrony Financial. The Motley Fool has a disclosure policy.