When you think “growth stocks,” mega-cap big tech names, or even smaller but high-profile companies in industries like AI, electric vehicles, or SaaS software may first come to mind.
But while there are, of course, plenty of strong growth opportunities within the tech sector, some of the most underrated, under-the-radar, and undervalued stocks in this category are likely to be found in the other sectors of the stock market.
Within the sectors, like the consumer sector, the healthcare sector, and in the industrial sector, there are stocks trading at low valuations relative to their respective long-term growth forecasts.
There are also stocks that, while perhaps trading at a fair price, and therefore aren’t likely to be re-rated to a higher valuation, could still deliver strong returns over a multiyear timeframe, as shares move higher in tandem with increased earnings.
So, what are some of the best examples? Consider these seven. Each one fits in either of this category, and should be worth a closer look at today’s prices.
Ensign Group (ENSG)
Ensign Group (NASDAQ:ENSG) is a leading operator of skilled nursing facilities in the United States. In my view, Ensign is arguably one of the most undervalued growth stocks. The company’s shares trade for 23.4 times forward earnings.
Forecasts call for earnings growth of 9.3% during 2024, and around 10.7% during 2025. Although forecasts are not absolute, and the current earnings multiple of ENSG stock may seem like it is reasonable for a company with this level of growth, it’s possible the market is underestimating Ensign’s long-term growth potential.
Why? Chalk it up to two factors discussed in my last recommendation of ENSG, as one of the top stocks to capitalize on the aging of America. First, this trend itself stands to serve as a strong long-term growth catalyst. Second, Ensign has a sound track record of making accretive “bolt-on” acquisitions of other SNF properties.
Lululemon Athletica (LULU)
Lululemon Athletica (NASDAQ:LULU) is a growth stock that needs little introduction. Most investors are well-aware of this Canada-based global purveyor of premium athletic apparel. Over the time, the company has steadily grown in size and profitability.
Right now, LULU stock could appear to some skeptics as fully-priced. Maybe, even “priced to perfection,” with its forward earnings multiple of 39.6.
Analysts like Jeffries’ Randal Konik have voiced concerns about near-term growth. Lululemon’s management itself has even conceded that the consumer spending slowdown could affect results during the holiday quarter, and in the quarters ahead.
That said, as InvestorPlace’s Joel Baglole recently pointed out, LULU did just deliver a solid quarterly earnings beat. The stock also appears to have momentum on its side. As a Seeking Alpha commentator also recently pointed out, expansion in China also presents an avenue for Lululemon to continue growing at an above-average pace.
O’Reilly Automotive (ORLY)
O’Reilly Automotive (NASDAQ:ORLY) shares are up more than sevenfold over the past decade. The auto part retailing stock may face challenges, but continued growth in earnings and stock price is possible.
ORLY stock currently trades for 24.9 times forward earnings. This forward multiple is likely sustainable. Besides the prospect of consistent double-digit earnings growth, O’Reilly also has several company-specific strengths that may make it more recession-resistant than peers.
Demand trends for aftermarket parts are likely to remain favorable. The number of years the average automobile stays on the road keeps climbing. This factor, plus O’Reilly’s strengths in grabbing market share and maximizing profitability, not to mention the company’s aggressive repurchasing of shares, all points to earnings (and in turn, the stock itself) continuing to keep steadily increasing over time.
Transdigm Group (TDG)
Transdigm Group (NYSE:TDG) is a diversified aerospace and defense firm. TDG has been a long-term compounder, with shares up tenfold over the past decade, although shares did have an extended period of subpar performance starting in 2020.
In 2023, however, TDG stock has once again lived up to its high-growth reputation. Transdigm has this year reported strong quarterly results, especially in its latest quarterly earnings release back in November. Beating on both revenue and earnings per share (or EPS), the company’s top and bottom lines grew 23% and 46%, respectively, compared to the prior year’s quarter.
For the full year, revenue was up 21%. EPS increased by 50%. With the company guiding for further strong growth from its commercial segment, coupled with its own extensive track record of successful “bolt-on” acquisitions, although pricey at 30.4 times earnings, TDG appears set to stay in the growth fast lane.
Texas Roadhouse (TXRH)
While contending with industry issues like inflationary pressures, restaurant operator Texas Roadhouse (NASDAQ:TXRH) has continued to report solid growth, thanks to both strong same-store sales growth and from growth in restaurant locations.
Last quarter, revenue rose by nearly 13%, with existing locations reporting sales growth in the 8% range. Although EPS rose by only 2.6% compared to the prior year’s quarter, as recent economic indicators suggest inflation is cooling, Texas Roadhouse may soon again report a higher level of earnings growth.
Estimates call for earnings growth of around 16.7% next year, and 14.2% during 2025. Even if TXRH stock doesn’t experience any further multiple expansion, such results will likely lead to double-digit returns. TXRH also offers strong potential as a dividend growth stock. TXRH’s 1.9% dividend has increased by an average of 17.1% annually over the past five years.
UnitedHealth Group (UNH)
Earlier this month, I discussed UnitedHealth Group’s (NYSE:UNH) strengths as a multi-generational growth stock. UNH has the potential for above-average growth with its diversified healthcare offerings.
But even if you’re looking for growth stocks that could bloom over a shorter time horizon, UNH stock is still a strong choice.
Forecasts call for earnings growth in the low-to-mid teens range in each of the next two years. UnitedHealth Group isn’t a high-yielder, yet with its dividend (current forward yield of 1.42%) growing by 16.14% annually on average over the past five years, over time these payouts are likely to keep increasing in size.
With these growth bona fides, it’s easy to see why my InvestorPlace colleague Alex Sirois recently called UNH one of the “next Magnificent Seven stocks.”
Ermenegildo Zegna (ZGN)
Ermenegildo Zegna (NYSE:ZGN) is an Italian fashion house. Besides its eponymous luxury brand Zegna, the company owns the Thom Browne and Tom Ford brands. While the company and the brand is well known around the world, it’s apt to call ZGN one of the underrated growth stocks.
Why? While not cheap at 24 times forward earnings, ZGN stock likely can sustain this valuation. Other luxury-focused consumer companies, like LVMH (OTCMKTS:LVMHF) sport similar multiples. As cChairman and CEO Ermeneguildo “Gildo” Zegna discussed in the latest earnings release, there are many avenues for the company to pursue in order to sustain above-average levels of sales and earnings growth.
These include China-related growth tailwinds, plus the strong growth potential with the aforementioned Thom Browne and Tom Ford brands. Given these factors that could one day make it a hot fashion stock, consider taking advantage of ZGN’s current overlooked, under-the-radar status.
On the date of publication, Thomas Niel did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
