Growth boosts valuation multiples, but it doesn’t always last forever. Companies that cannot maintain it are often penalized with large declines in market value, a lesson ingrained in investors who lost money in tech stocks during 2022.
Deciphering which businesses can sustain their high growth rates is a challenge for even the most seasoned professionals, which is why we started StockStory. That said, here are three growth stocks climbing an uphill battle and some other opportunities you should consider instead.
Quanex (NX)
One-Year Revenue Growth: +29.9%
Starting in the seamless tube industry, Quanex (NYSE: NX) manufactures building products like window, door, kitchen, and bath cabinet components.
Why Are We Cautious About NX?
- Costs have risen faster than its revenue over the last five years, causing its operating margin to decline by 4.6 percentage points
- Incremental sales over the last two years were much less profitable as its earnings per share fell by 6.9% annually while its revenue grew
- Free cash flow margin dropped by 6.7 percentage points over the last five years, implying the company became more capital intensive as competition picked up
Quanex is trading at $19.98 per share, or 7.7x forward price-to-earnings. To fully understand why you should be careful with NX, check out our full research report (it’s free).
Select Medical (SEM)
One-Year Revenue Growth: +25.4%
With a nationwide network spanning 46 states and over 2,700 healthcare facilities, Select Medical (NYSE: SEM) operates critical illness recovery hospitals, rehabilitation hospitals, outpatient rehabilitation clinics, and occupational health centers across the United States.
Why Does SEM Fall Short?
- Declining admissions over the past two years show it’s struggled to increase its sales volumes and had to rely on price increases
- Forecasted revenue decline of 17.4% for the upcoming 12 months implies demand will fall off a cliff
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 11.5 percentage points
At $17.12 per share, Select Medical trades at 14.7x forward price-to-earnings. If you’re considering SEM for your portfolio, see our FREE research report to learn more.
Corcept (CORT)
One-Year Revenue Growth: +39.9%
Focusing on the powerful stress hormone that affects everything from metabolism to immune function, Corcept Therapeutics (NASDAQ: CORT) develops and markets medications that modulate cortisol to treat endocrine disorders, cancer, and neurological diseases.
Why Are We Wary of CORT?
- Subscale operations are evident in its revenue base of $675 million, meaning it has fewer distribution channels than its larger rivals
- Efficiency has decreased over the last five years as its adjusted operating margin fell by 15.9 percentage points
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 13.6 percentage points
Corcept’s stock price of $60 implies a valuation ratio of 26.3x forward price-to-earnings. To fully understand why you should be careful with CORT, check out our full research report (it’s free).
Stocks We Like More
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