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. On that note, here is one growth stock expanding its competitive advantage and two whose momentum may slow.
Two Growth Stocks to Sell:
Array (AD)
One-Year Revenue Growth: +98.9%
Operating as a majority-owned subsidiary of Telephone and Data Systems since its founding in 1983, Array (NYSE:AD) is a regional wireless telecommunications provider serving 4.6 million customers across 21 states with mobile phone, internet, and IoT services.
Why Do We Pass on AD?
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Sales tumbled by 44.7% annually over the last five years, showing market trends are working against it during this cycle
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Free cash flow margin dropped by 162.1 percentage points over the last five years, implying the company became more capital intensive as competition picked up
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Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders
Array is trading at $35.64 per share, or 32.1x forward P/E. Read our free research report to see why you should think twice about including AD in your portfolio, it’s free.
Hamilton Insurance Group (HG)
One-Year Revenue Growth: +15.5%
Founded in 2013 and operating through three distinct underwriting platforms across four countries, Hamilton Insurance Group (NYSE:HG) operates global specialty insurance and reinsurance platforms across Lloyd’s, Ireland, Bermuda, and the United States.
Why Do We Think Twice About HG?
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Projected sales are flat for the next 12 months, implying demand will slow from its two-year trend
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Costs have risen faster than its revenue over the last two years, causing its pre-tax profit margin to decline by 1.5 percentage points
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Incremental sales over the last two years were less profitable as its 14% annual earnings per share growth lagged its revenue gains
At $35.17 per share, Hamilton Insurance Group trades at 1.1x forward P/B. Check out our free in-depth research report to learn more about why HG doesn’t pass our bar.
One Growth Stock to Watch:
e.l.f. Beauty (ELF)
One-Year Revenue Growth: +31.2%
Short for “eyes, lips, face”, e.l.f. Beauty (NYSE:ELF) is a developer of high-quality beauty products at accessible price points.
Why Do We Watch ELF?