Why I Just Bought These 3 Stocks

I'm always on the lookout for fast-growing stocks to include in my retirement portfolio. Recently, I bought shares in Paycom Software, Inc. (NYSE: PAYC), BioMarin Pharmaceutical (NASDAQ: BMRN), and 2U Inc. (NASDAQ: TWOU). Are these stocks right for your portfolio, too? Read on to learn why I think these companies can deliver market-beating returns.

A new take on an old industry

In the past, payroll processing companies racked up billions of dollars in sales by providing basic services, including check-writing and tax withholding and reporting. Nowadays, companies like Paycom Software are disrupting the market by providing solutions addressing everything human resources does, including recruitment, training, scheduling, performance measurement, and benefits.

Instead of selling software that clients install on their own servers, Paycom's software is available via cloud-based subscriptions that produce recurring revenue. The software is designed to be a single repository for employee data that eliminates the need to enter worker information in multiple databases. Paycom makes more money as its customers hire more people and it also generates revenue by offering a broad slate of add-on modules that make its software more useful.

Its simplified user experience approach is resonating with employers and demand for its solution is increasing as job growth continues nationally. A low unemployment rate and contributions to sales from new offices have resulted in 42% compound annual sales growth since 2013.

While many fast-growing software-as-a-service companies lose money, Paycom's been profitable for years. Its net income was $67 million on sales of $433 million in 2017, and that was up substantially from net income of $21 million on sales of $225 million in 2015.

Paycom's customer list already tops 20,000 small and mid-sized companies, but it still only serves about 70% of U.S. major metropolitan markets. It opened three new offices last year, and over the next one to two years, it plans to open another 10 to 14 new offices.

In Q1 2018, Paycom's sales grew 29% year over year to $154 million because of its expansion plans and cross-selling strategy. As a result, management's guidance is for sales to increase by about 26% this year to at least $545 million. If Paycom continues to deliver that kind of growth (and I think it can), then it could be a very profit-friendly addition to my portfolio.

7th time's the charm?

In an industry where failure is common, there are few mid-sized biopharma companies that have successfully crossed the Food and Drug Administration's (FDA) finish line as frequently as BioMarin has.

BioMarin's run the FDA gauntlet successfully seven times. That includes when it secured an FDA green light in May for Palynziq, its second treatment for phenylketonuria (PKU), a rare disease that can cause irreversible brain damage and neurological problems, including seizures.

This latest approval could be its biggest. Its first PKU medicine, Kuvan, is only used in about 2,000 of the over 10,000 PKU patients currently being treated in U.S. clinics, yet Kuvan's the company's second-best-selling product with $408 million in sales in 2017.

Palynziq is an enzyme substitution therapy that can help break down phenylalanine so that it doesn't build up in the brain, and BioMarin thinks it could treat more people with it than it does with Kuvan. With a price tag of $192,000 per year and an addressable market in the thousands of patients, Palynziq's peak sales could top $1 billion someday.

Unlike Paycom, BioMarin isn't turning a profit yet. But a successful launch of Palynziq could get it over the hump. Prior to securing Palynziq's FDA OK, management was already saying that its sales would improve to $1.5 billion this year from $1.3 billion in 2017. It could take a little bit for Palynziq's sales to ramp up, but it wouldn't surprise me if BioMarin boosts its forecast later this year.

Palynziq isn't the only reason I like BioMarin, though. It's also got a gene therapy in phase 3 pivotal trials for hemophilia A, a blood clotting disorder, and that's a multibillion-dollar indication. Its hemophilia A trial should be fully enrolled by Q1 2019, and given that this is a head-to-head trial against the existing standard of treatment (factor VIII prophylaxis), picking up shares now could pay off handsomely if this trial's a winner.

Online education, with a twist

Tech-savvy millennials are increasingly separating themselves from their peers by obtaining certificates and advanced degrees online, and those certificates and degrees are often being awarded by colleges using 2U's online education software.

In exchange for more than half of participating students' tuition, 2U sets up online graduate programs for 24 top-notch schools, including the University of North Carolina (10% of sales) and the University of Southern California (27% of revenue). It does this through long-term contracts (10 to 15 years), and currently, students can choose from 50 digital graduate degree programs, including 10 that were launched last year. Over the next two years, 2U thinks that the number of programs it offers could nearly double as current partners expand their offerings and new schools sign up for its services.

Last year, it acquired GetSmarter to enter the short-course market. That business delivers skills training to professionals through 80 online courses offered in collaboration with 10 universities. Right now, the short course segment represents less than 10% of 2U's revenue, but over time, it could contribute more meaningfully.

In 2017, 2U's sales increased 39% to $287 million and that momentum carried over into Q1 2018, when sales were $92.3 million, up 42% from one year ago. In fiscal 2018, 2U's guidance is for revenue of between $406.6 million and $410.6 million, up from $286.8 million in 2017.

2U isn't profitable yet -- it expects its adjusted net loss to be between $5.3 million to $7.2 million in fiscal 2018 -- but I'm betting that a payoff will come in time as more students enroll and these programs mature.

Overall, Paycom, BioMarin Pharmaceutical, and 2U Inc. could deliver years of double-digit revenue growth, but none of these companies is a risk-free investment. Paycom's market is still dominated by deep-pocketed players and there's no guarantee that BioMarin's Palynziq will be a commercial success. Similarly, while 2U Inc. is disrupting higher education, it's not the only company that's set sights on this opportunity. Among its challengers is Noodle Partners, a company founded by 2U's former CEO and co-founder, John Katzman. Nevertheless, I think the market opportunity ahead of these companies outweighs the risks facing them, and if I'm right, owning them for the long haul could be smart.

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Todd Campbell owns shares of 2U, BioMarin Pharmaceutical, and Paycom Software. His clients may have positions in the companies mentioned. The Motley Fool owns shares of and recommends Paycom Software. The Motley Fool recommends 2U and BioMarin Pharmaceutical. The Motley Fool has a disclosure policy.