3 Beaten-Down Growth Stocks With More Than 50% Upside Potential

Following the stock market bottom in March 2020, growth stocks dominated the list of best-performing stocks for the first year of the new bull market. Since then, growth stocks have been mired in a brutal bear market. There is no better example of this than…

Cathie Wood’s Ark Innovation ETF (ARKK – Get Rating), which had a 391% gain from March 2020 to its high in February 2021. Since then, ARKK has given back most of these gains and is down 60% from these lofty levels.

The major factor behind this sharp decline is increasing inflationary pressures, resulting in expectations that the Fed will hike 7 times this year. Rising inflation and interest rates are bearish for growth stocks because it makes their future cash flows less valuable. However, we also know that such severe selling and oversold markets also create an opportunity to buy high-quality stocks at a discount.

The key is to look for companies whose earnings momentum and growth are unaffected by changes in economic or monetary conditions. Therefore, investors should consider buying the following 3 high-quality growth stocks: Veeva Systems (VEEV – Get Rating)Resmed, Inc. (RMD – Get Rating), and Zoetis (ZTS – Get Rating).

Veeva Systems (VEEV – Get Rating)

VEEV is a cloud computing and enterprise software company for the healthcare, pharmaceutical, and life sciences industries. It provides software solutions for the unique needs of companies in these industries, from meeting regulatory standards to conducting clinical trials to managing operations.

Thus, it’s positioned at the intersection of two booming trends – healthcare and cloud computing – which show no signs of exhaustion and has birthed some of the biggest stock market winners in recent history.

The healthcare sector’s growth is fueled by demographics due to an aging population in developed countries all over the world, increased government spending, and the constant stream of innovations that lead to new treatments. Healthcare spending as a share of GDP has risen to 18% in 2020, from under 12% in 1990.

VEEV combines the growth and high margins of a cloud computing company with the attractive economics of the healthcare industry that has high switching costs and wide moats, leading to high rates of recurring revenue.

These positives are reflected in VEEV’s last earnings report which shows a 26% increase in revenue and a 28% jump in operating income. Next quarter, analysts expect 13% earnings growth. This combination of earnings growth and stock price deflation has resulted in valuations becoming quite attractive, especially considering that it has profit margins that are more than double that of the S&P 500 and expectations of double-digit earnings growth over the next 5 years.

Thus, it’s not surprising that VEEV has an overall B rating, which translates to a Buy in our POWR Ratings system. It also has an A for Quality as it’s one of the leading stocks in a large total addressable market with only a handful of competitors. VEEV also has a B for growth makes sense given its intersection of two large and growing markets – healthcare and cloud computing. Click here to see more of VEEV’s POWR Ratings including grades for Value, Momentum, and Stability.

Resmed, Inc. (RMD – Get Rating)

RMD develops, manufactures, distributes, and markets medical devices and software applications for the healthcare market. The company operates in two segments: Sleep and Respiratory Care; and Software as a Service.

RMD provides treatments for issues like sleep apnea with its CPAP devices and masks as well as devices for obstructive pulmonary disease, neuromuscular disease, and other respiratory-related conditions. Unfortunately due to rising rates of chronic health issues like diabetes and obesity, the demand for RMD’s products is only growing.

This makes RMD a high-quality growth stock as its long-term prospects are disconnected from short-term issues like economic growth rates or monetary policy. Instead, RMD is serving a growing market with products that are essential for improving quality of life. Due to their nature…

 

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