Early Growth Stocks for 2017

Early Growth Stocks for 2017

Growth-style investing works best when you allow your biggest winners to run: They compound their returns over time and overcompensate for the losses from the laggards. But it also requires identifying the right companies at the right time and having a lot of patience.

The process

To help identify those big future winners, here are three qualities I always look for in growth companies:

1. Operational performance. When you invest, you’re buying a stake in a business, so you want to find businesses that are performing very well. Develop a list of meaningful operational metrics that are relevant to the particular industry, and then look for companies that are killing it where it really counts. This means putting less emphasis on the current P/E ratio, and more on metrics that evaluate business performance.

2. Smart and visionary management. Growth companies are still… growing. This makes them much more sensitive to managerial decisions — whether good or bad. Look for leaders who are committed to the long-term success of the company. I like CEOs who are either co-founders, or who have a significant ownership stake — preferably both.

3. Huge market potential. Small companies don’t always do so well in price wars. Find industries large enough to support a new player. I look for the company’s total annual revenue to be a very small slice of the overall industry.

This year’s list

It’s time to fire up the crystal ball once again. Without further ado, here are three top recommendations for 2017 as published by motleyfool.com:

1. Illumina (NASDAQ:ILMN) is the global leader in genomic sequencing.

Illumina has run more than 90% of the world’s DNA tests, which are increasingly being used to treat existing illnesses or to screen for cancer. But the real catalyst going forward is that — largely thanks to Illumina’s R&D efforts — the cost of sequencing a human genome has fallen to less than $1,000. This is driving adoption and insurance reimbursement. The total number of people who have had their full genome sequenced increased twentyfold in two years, from 40,000 at the end of 2013 to more than 800,000 by 2015. DNA sequencing may have even helped to explain how Ozzy Osbourne has managed to survive so many decades of rock and roll.

Sixty percent of Illumina’s revenue comes from the recurring sale of consumables, so the falling price point of the tests is great for the company’s business and margins. Chairman Jay Flatley was the visionary who refined the company’s sequencing technology and processes, while CEO Francis deSouza is a bigger-picture systems thinker who will lead the company to the next level.

We think Illumina may have cracked the code of excellent future investor returns.

2. Ellie Mae (NYSE:ELLI) offers a fully automated solution for lenders to use to make mortgage origination loans. 

The company’s Encompass cloud-based software simplifies the extremely complex mortgage process, which allows lenders to close more loans and capture more commissions. Encompass now has 160,000 users, and the $640 of revenue per user in the most recent third quarter was an all-time high. 

CEO Jonathan Corr was instrumental in helping Chairman Sig Anderman build the original Encompass platform, and he really knows the the ins and outs of the industry. The current 1.3 million new construction starts is the highest level of new activity since 2007, and there are expected to be more than $1 trillion of home purchases in 2017.

There are plenty of business opportunities for Ellie Mae to build on in the coming years.

3. 2U (NASDAQ:TWOU) administers graduate education courses over the internet. 

The company teams up with larger institutions — including the University of Southern California, the University of North Carolina, or UC-Berkeley — to enroll students into existing classes. Programs tend to start small but tend to scale up quickly. For example, UNC had just 19 students in its online MBA program with 2U in 2011, but it has they 729 today, and U.S. News & World Report just ranked it as one of the best online MBA programs in the nation. 

2U markets its program, runs the online platform, and produces content in exchange for taking roughly two-thirds of student tuition. UC-Berkeley recently praised it as “arguably the most successful online degree on the UC Berkeley campus, perhaps in the entire UC system.”

Chip Paucek was 2U’s co-founder and remains as CEO today. He’ll lead the company’s growth into an industry with huge upside potential. The U.S. has more than 2,300 four-year colleges, yet 2U’s total enrollment is still only around 20,000 students.

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