Investing in growth stocks is one of the most effective ways to build wealth. The only problem is that they can be volatile when earnings results don't quite satisfy the high expectations that are usually embedded in their lofty valuations.
But I never sweat these episodes, because I have found that investors have a tendency to underestimate how much particular companies can grow over long periods of time. The strongest companies keep on finding ways to grow, which can lead to huge gains for investors who remain patient through thick and thin.
Two growth stocks I would buy today are MercadoLibre (MELI 3.09%) and TE Connectivity (TEL -0.19%). Both companies have plenty of opportunities to keep expanding in their respective markets and should deliver above-average returns.
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MercadoLibre
MercadoLibre should be on your radar if it isn't already. It's the digital commerce leader in Latin America, one of the fastest-growing e-commerce markets in the world, and the business has performed like it.
MercadoLibre has consistently reported phenomenal revenue growth for a long time, and investors have reaped the rewards. The shares are up 950% in just the last five years. If you think it's too late to jump on board, consider its recent performance.
In the second quarter, currency-neutral revenue growth clocked in at 102% year over year, which doesn't look like a business that is done growing by a long shot. Over the last five years, revenue has grown more than sevenfold, which has pushed the stock higher.
The company operates across several segments, including marketplace, advertising services, logistics solutions, and mobile payments. It's sort of like eBay and PayPal Holdings all in one. Expanding its Mercado Pago payments business to non-marketplace transactions is one area where it has had tremendous success. Off-platform payment volume, which counts the transactions made away from MercadoLibre's marketplace business, grew 93% year over year in the second quarter in local currency.
Management is investing aggressively to grow its user base. It currently has 75 million unique active users across its platform, but there are more than 450 million internet users across Latin America and the Caribbean. Operating expenses, including product development and marketing, increased 79% last quarter, which is pressuring profits, but should lead to further growth in users, buying frequency, and revenue.
MercadoLibre looks expensive at a forward price-to-earnings ratio of 571, but its price-to-sales multiple of 15.9 shows that it should be priced about right once management backs off the high marketing spending and lets more profit shine through. By comparison, Mercado's U.S.-based counterpart PayPal trades at 13.5 times trailing sales, but MercadoLibre is growing much faster, which justifies its higher valuation.
Investing behind the growth of e-commerce seems like a smart bet, and MercadoLibre is one of the best horses to bet on in this race.
TE Connectivity
TE Connectivity is a leader in providing connectors, sensors, cables, and other products for the transportation, industrial, and communications markets. The stock has more than doubled over the last five years, but given increasing demand from automated factories, data centers, and adoption of electric vehicles (EVs), TE Connectivity should continue earning shareholders above-average returns.
Like many economically sensitive companies, TE Connectivity saw sales dip last year as COVID-19 disrupted supply chains and operations. But revenue has accelerated since the start of fiscal 2021 in September, climbing 6% on an adjusted basis year over year in the fiscal first quarter, followed by 11% in the second quarter, and 45% in the third.
These results show the company is well positioned to continue benefiting from the secular demand trends in EV technology, medical needs, smart buildings, and high-speed data centers.
While TE Connectivity carries more debt than cash on its balance sheet, it generated $2 billion in free cash flow on $14.4 billion in revenue over the last four quarters. It also pays a regular dividend of $0.50 per share every quarter, bringing the dividend yield to 1.4% at the current quote.
Analysts expect TE Connectivity to post growth in EPS of 52% this year and 9% next year. Investors who are hesitant to buy MercadoLibre because of its expensive valuation should find TE Connectivity's forward P/E of 22.8 more appealing, which looks like a decent value relative to growth expectations.
