Over the past year, growth stocks have been plagued by the Fed’s aggressive interest rate hikes. When interest rates move higher, growth stocks look less attractive to investors. With inflation falling, the Fed is looking toward smaller rate hikes this year.
After a year of consolidation, growth stocks, Salesforce, Inc. (CRM), McKesson Corporation (MCK), and ADT Inc. (ADT), could prove to be favorable investments for potential gains in 2023.
With a hotter-than-expected jobs report and inflation rising sequentially in January, Fed officials remain cautious as inflation remains above the Federal Reserve’s target of 2%. Minutes from the Fed’s policy meeting earlier this month show that the members believe “ongoing” rate hikes would be necessary.
On the other hand, according to Goldman Sachs Group Inc.’s (GS) Chief Credit Strategist Lotfi Karoui, the Fed would be able to bring inflation down and achieve a “soft landing.”
Moreover, the investment bank expects only a 25% chance of the economy slipping into a recession, down from its previous estimate of 35%. Investors’ interest in growth stocks is evident from the Vanguard Growth ETF’s (VUG) 10.1% returns year-to-date.
Amid this backdrop, it could be wise for investors to buy fundamentally strong growth stocks CRM, MCK, and ADT.
Salesforce, Inc. (CRM)
CRM provides customer relationship management technology that brings companies and customers together worldwide. Its Customer 360 platform empowers its customers to work together to deliver connected experiences for their customers. The company's service offerings include sales, service, marketing, and commerce, among others.
CRM’s revenue grew at a CAGR of 24.1% over the past three years. Its total assets grew at a CAGR of 22.5% over the past three years. Likewise, its levered FCF grew at a CAGR of 21.8% during the same period.
In terms of the trailing-12-month gross profit margin, CRM’s 72.69% is 47.8% higher than the 49.18% industry average. Likewise, its 30.62% trailing-12-month levered FCF Margin is 345.9% higher than the industry average of 6.87%.
For the fiscal third quarter that ended October 31, 2022, CRM’s total revenues increased 14.2% year-over-year to $7.84 billion. The company’s gross profit increased 14.5% year-over-year to $5.75 billion.
Moreover, its non-GAAP net income increased 9.8% year-over-year to $1.40 billion. In addition, its non-GAAP EPS came in at $1.40, representing an increase of 10.2% year-over-year.
Analysts expect CRM’s EPS and revenue for the quarter that ended January 31, 2023, to increase 63.1% and 9.1% year-over-year to $1.37 and $7.99 billion, respectively. CRM has an impressive earnings surprise history, surpassing the consensus EPS estimates in each of the trailing four quarters. The stock has gained 23.8% year-to-date to close the last trading session at $164.12.
CRM’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, equating to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
Within the Software - Application industry, it is ranked #26 out of 137 stocks. It has an A grade for Growth and a B for Sentiment.
We have also given CRM grades for Value, Momentum, Stability, and Quality. Get all CRM ratings here.
McKesson Corporation (MCK)
MCK provides healthcare services in the United States and internationally. It operates through four segments: U.S. Pharmaceutical; International; Medical-Surgical Solutions; and Prescription Technology Solutions (RxTS).
MCK’s EBITDA grew at a CAGR of 8.7% over the past three years. Its EBIT grew at a CAGR of 15.4% over the same period.
In terms of the trailing-12-month EBIT margin, MCK’s 1.54% compares to the negative 1.15% industry average. Likewise, its trailing-12-month net income margin came in at 1.15% compared to the industry average of negative 5.61%.
MCK's revenues for the fiscal third quarter that ended December 31, 2022, increased 2.7% year-over-year to $70.49 billion. The company’s operating income increased 316.4% year-over-year to $1.24 billion. Its adjusted earnings increased 3% year-over-year to $972 million. Additionally, its adjusted EPS came in at $6.90, representing a 12.2% increase from the prior-year quarter.
Analysts expect MCK’s EPS and revenue for the quarter ending March 31, 2023, to increase 21.9% and 3% year-over-year to $7.11 and $68.08 billion, respectively. The stock has gained 10% over the past nine months to close the last trading session at $360.33.
It is no surprise that MCK has an overall rating of A, which equates to a Strong Buy in our POWR Ratings system. Within the Medical - Services industry, it is ranked first out of 79 stocks. It has an A grade for Growth and Value and a B for Stability, Sentiment, and Quality.
In total, we rate MCK on eight different levels. Beyond what we stated above, we have also given MCK a grade for Momentum. Get all MCK ratings here.
ADT Inc. (ADT)
ADT provides security, automation, and smart home solutions to consumer and business customers. It provides a range of fire detection, fire suppression, video surveillance, and access control systems to residential, commercial, and multi-site customers.
ADT’s revenue grew at a CAGR of 6.9% over the past three years. Its EBIT grew at a CAGR of 18% over the past three years.
In terms of the trailing-12-month gross profit margin, ADT’s 68.56% is 94.2% higher than the 35.30% industry average. Its trailing-12-month EBITDA margin of 37.65% is 238.9% higher than the 11.11% industry average. Likewise, its 11.88% trailing-12-month levered FCF margin is 728.9% higher than the industry average of 1.43%.
ADT’s total revenue for the fiscal third quarter that ended September 30, 2022, increased 21.8% to $1.60 billion. The company’s adjusted net income came in at $83 million, compared to an adjusted net loss of $54 million in the prior-year period.
Additionally, its adjusted EBITDA increased 11.9% year-over-year to $620 million, while its adjusted EPS came in at $0.10, compared to an adjusted loss per share of $0.07 in the prior-year quarter.
Analysts expect ADT’s EPS for the quarter ending March 31, 2023, to increase 31.1% year-over-year to $0.12. Its revenue for the quarter that ended December 31, 2022, is expected to increase 17.4% year-over-year to $1.62 billion. Over the past nine months, the stock has gained 15.1% to close the last trading session at $8.06.
ADT’s POWR Ratings reflect solid prospects. The stock has an overall rating of B, equating to Buy in our proprietary rating system. Within the Home Improvement & Goods industry, it is ranked #6 out of 59 stocks. The company has an A grade for Growth and a B for Stability and Sentiment.
Click here to see the additional POWR Ratings of ADT for Value, Momentum, and Quality.
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CRM shares were unchanged in premarket trading Friday. Year-to-date, CRM has gained 21.43%, versus a 3.47% rise in the benchmark S&P 500 index during the same period.
About the Author: Malaika Alphonsus
Malaika's passion for writing and interest in financial markets led her to pursue a career in investment research. With a degree in Economics and Psychology, she intends to assist investors in making informed investment decisions.
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