Stocks that grow quickly are exciting. However, it is crucial that any elevated growth in revenues is also met with growth in profits and cash flow. Companies that can scale profits with revenues have a much higher chance of delivering sustainable returns over long periods of time. The gold standard is stocks that grow revenues but also grow earnings even faster (meaning they have operational leverage).
Buy growth stocks that are also profitable
Investors need to be very cautious about acquiring stocks that grow for the sake of growth and not by profitability. When economic or market headwinds hit, these stocks are often the quickest to fall. No profits mean the balance sheet can quickly become extended, and the chances of growth declining increase. Declining growth means a decline in expectations and an eventual decline in stock value.
Long-term investors are much better off holding stocks that can provide sustainable long-term growth in both revenues and profits. If you are looking for fast-growing, profitable stocks, you may want to check out these three stocks.
A power solutions stock
Hammond Power Solutions (TSX: HPS.A) has had an incredible run in 2023. Its stock is up over 300% over the year. With a market cap of $710 million, many investors have not likely heard of this company.
Yet over the past few years, it has grown to become a leader in manufacturing/distributing specialized electrical power transformers around the world. Long-term trends, such as electric grid transformation, electric vehicles, near-shoring, and data storage, support demand for Hammond’s products.
While revenues have grown around 115% over the past three years, earnings per share have also grown by around 300%. Despite this, the stock only trades for 12.5 times earnings right now.
An energy services stock
Another high-growth stock you have likely never heard of is TerraVest Industries (TSX: TVK). TerraVest stock is up 250% over the past five years. It does not operate in a sexy industry.
It owns, operates, and acquires niche businesses related to the energy industry. These include specialized trailers, transportation services, energy equipment, and HVAC products.
Its secret sauce is that it can acquire these businesses at very attractive prices. It then applies operational and management expertise, elevates cash flows, and re-invests into more businesses of the like.
Terravest has grown revenues and earnings per share by a respective 100% each over the past three years. The cherry on the cake is that it pays an attractive 1.45% dividend yield and only trades for 13.9 times earnings today.
A top transportation stock
TFI International (TSX: TFII) has delivered exceptional returns over the years. Its stock is up over 277% in the past five years and 780% in the past 10 years. Like TerraVest, its business is not flashy. It provides a mix of logistics, less-than-truckload, and package/courier services across North America.
While this is not an ultra-growth industry, TFI has done a great job acquiring smaller niche players. It has a formula for helping them maximize profitability. The company has grown earnings per share by around 20% annually for the past five years.
The company has an excellent chief executive officer, who also owns a large stake in the business. One of its largest competitors recently announced bankruptcy. Many suspect that could be a large opportunity for TFI to take market share.
Even though the stock is up 36% this year, you can snag this stock for 17 times earnings. That is below its average growth rate, so it still looks like a bargain.
