Expanding product lines and promising industries fueling the enduring success of American leaders
In the world of investment, strategies that focus on revenue, margin, and earnings growth are popular among investors seeking companies with high upside potential. These strategies, often falling under categories like Growth Investing and Growth at a Reasonable Price (GARP), target companies that have demonstrated the ability to consistently increase sales, improve profitability, and expand earnings.
A prime example of a GARP approach is buying companies with solid earnings and dividend growth histories but that are still reasonably priced relative to their earnings. For instance, Wesfarmers (ASX: WES), an Australian company operating dominant retail brands such as Bunnings and K-Mart, demonstrates solid margin and earnings growth but trades at a premium price, necessitating a careful weighing of growth against valuation.
Companies exhibiting strong revenue and earnings growth with improving margins often come from sectors poised for expansion or those with strong competitive moats. European companies in sectors like luxury goods, healthcare, and semiconductors have been highlighted for their profitability and potential for earnings growth, thus representing investment opportunities for those focusing on these fundamentals.
In the US market, earnings season reports, which detail EPS, revenue, and profit margin trends, are key signals for investors using options or other strategies to position for stock price moves around announced growth results.
Axon Enterprises (Nasdaq: AXON), previously known as Taser, is a company focusing on reducing deaths by firearms, with its non-lethal Taser product gaining traction globally. The company's bodycam product and AI software write up reports for police officers, saving time and being one of the few real-world applications of AI today, saving police officers an average of four hours of work a day.
Investment approaches targeting companies with revenue, margin, and earnings growth combined with reasonable valuation also focus on identifying firms with consistent historical growth in revenue and earnings. They analyse profit margins to ensure that profitability is improving or stable, and value the company at a reasonable price relative to earnings or cash flow to avoid overpaying.
Three stocks with considerable upside potential have been identified. Dollar General (NYSE: DG) is one such stock, reporting accelerating revenue and margins in its latest earnings call, causing the stock to jump 16%. Dollar General's stock is trading at 0.4 times sales, indicating that it is cheap and primed for a rerating. The company is in the early stages of a significant turnaround due to its competitor, Family Dollar, closing stores and donating market share.
Palantir (Nasdaq: PLTR) is another stock with considerable upside potential. Palantir is a software developer specializing in defense and AI, with clients including the CIA and US military. The company is unique in its product suite and is growing revenue at an annual pace of 55%.
The portfolio construction approach includes core stock selection for long-term thematic winners and tactical selection based on growth and inflation outlook. Companies with these characteristics are often at the start of a new product cycle. The investment process prioritizes companies with growing revenue, margins, and earnings.
Axon Enterprises' global market penetration is still in the single digits, and it is expected to continue its 27% top-line growth. The acceleration of all three factors indicates a stock likely to perform well. However, the approach to risk varies based on the business cycle: aggressive in bull markets, defensive in bear markets. Concerns over tariffs and household spending have been priced into Dollar General's stock, making it cheap and primed for a rerating.
- Some investors may choose to invest in technology companies, such as Axon Enterprises (Nasdaq: AXON), that are growing rapidly, like the company's annual revenue growth rate of 55%, and have unique products, such as its AI software for police officers that saves time.
- Companies like Dollar General (NYSE: DG) are attractive to investors who focus on revenue, margin, and earnings growth, as it recently reported accelerating revenue and margins and is trading at a relatively low multiple of sales compared to competitors, suggesting the potential for a rerating.
- As part of a portfolio construction strategy, investors may seek stocks with growth potential, like Palantir (Nasdaq: PLTR), and companies with a strong competitive position, such as those in the luxury goods or healthcare sectors, as they have the potential to continue increasing sales, profits, and earnings over the long term.
