When you hear the term “growth stocks,” you probably think of high-growth yet unprofitable companies diluting shareholders through secondary offerings just to fund more losses. But that doesn’t always have to be the case. Bargain growth stocks exist, and many have strong core businesses that are actually profitable or produce minimal losses. And when you can invest in these companies while their shares are trading at beaten-down levels, the long-term upside can be tremendous.
The key is finding growth stocks with solid financials. That way, there’s limited dilution or execution risk that can be a drag on share prices over the coming years. Indeed, if you’re buying when sentiment is overly pessimistic, these companies are unlikely to disappoint, and these companies’ risk-reward ratio becomes heavily stacked in your favor.
Let’s dive in!
Zymeworks (ZYME)
Naturally, with biotech stocks, there is always an element of risk. However, Zymeworks (NASDAQ:ZYME) strikes me as one biotech stock with a reasonably strong foundation.
With $295 million of cash on hand, the business appears to be well-funded, allowing Zymeworks to advance its pipeline over the next few years. This is one of the few high-growth biotech stocks for which I believe meaningful dilution or debt accumulation risk is somewhat mitigated. Personally, I expect Zymeworks to achieve profitability organically in the near-term.
The company’s lead pipeline asset is zanidatamab, a bispecific antibody targeting HER2 across several cancer types, including breast, gastric, and biliary tract cancers. Thus far, data from multiple clinical studies have underscored zanidatamab’s promising efficacy and safety. For instance, at the recent ESMO conference, updated results demonstrated “meaningful clinical benefit” in HER2-positive gastroesophageal cancers. Additionally, zanidatamab received FDA Breakthrough Designation status back in 2020, underscoring its potential.
In my view, at current levels, Zymeworks offers substantial upside considering its strong cash position and promising lead asset. As pipeline advancements continue, I believe the stock deserves to trade at a higher multiple. Of course, clinical setbacks could occur, but the risk-reward setup appears skewed positively in favor of long-term investors at this point.
Innovative Industrial Properties (IIPR)
Innovative Industrial Properties (NYSE:IIPR) is essentially a specialized REIT focused on the cannabis industry. I know some investors avoid this company due to its REIT structure, but I believe IIPR warrants a closer look. While typical REITs face pressure from remote work trends, Innovative Industrial’s tenants operate cannabis cultivation and processing facilities. These mission-critical assets are unaffected by white-collar office demand dynamics.
Admittedly, cannabis operators pose elevated credit risks, with still-constrained access to capital. However, Innovative Industrial continues collecting over 97% of rents due. My take is even if the cannabis market sours, tenants will prioritize rent payments to preserve essential production capacity, and would be more likely to cut costs elsewhere first.
With rock-solid rent collection numbers, Innovative Industrial offers a unique way to invest in the high-growth cannabis market as a REIT with recession-resistant cash flows. The stock trades at just 8-times forward funds from operations (FFO), which is quite cheap for a company expected to grow revenue by more than 11% this year. Therefore, I believe patient investors could see strong long-term upside here, especially if you keep reinvesting that juicy 8.4% dividend yield. And of course, there is always the potential catalyst of cannabis being legalized down the road that would be the rising tide lifting all ships in this space.
Shift4 Payments (FOUR)
Shift4 Payments (NYSE:FOUR) does not look cheap based on a trailing price-earnings ratio of over 44-times. However, expected earnings growth of 107% this year would reduce the company’s forward multiple to around 23-times, which is quite cheap for a fintech company. Notably, Shift4 is growing fast, with its revenue growth rate coming in at around 30% each year.
In my opinion, the company’s first-mover position in integrated payment processing software provides Shift4 with many competitive advantages. Shift4’s specialized software and proprietary gateway allow for tackling intricate systems that stymie large competitors. Once embedded, these solutions foster impressive customer retention.
Therefore, despite economic uncertainty hampering discretionary spending, I expect Shift4’s volumes to prove resilient as essential business systems rely on its infrastructure. Market share gains should persist as well. Given the steep growth runway ahead alongside reasonable valuations, I believe Shift4 Payments offers compelling upside, especially on additional pullbacks.
Mr. Cooper Group (COOP)
Mr. Cooper Group (NASDAQ:COOP) warrants a closer look, amidst a shaky real estate market. This umbrella organization encompassing various mortgage businesses sees consistent profitability from its servicing operations.
Current elevated mortgage rates combined with housing shortages seem likely to benefit operations. Of course, declines in mortgage rates are expected by mid-2023, but most mortgages are long-term. Thus, cash flows could remain strong for years. Additionally, the company’s strong financials have led to an impressively-cheap valuation multiple of only 9-times earnings. Thus, it appears there’s plenty of room for further upside over time.
With that said, headwinds like a potential recession could pressure results. But these risks appear to be outweighed by the potential rewards, given the company’s current valuation. Of course, continuously-sound execution remains vital, but Mr. Cooper’s track record looks solid to me.
Comtech Telecommunications (CMTL)
Comtech Telecommunications’ (NASDAQ:CMTL) long-term chart doesn’t look very pretty. However, its current valuation looks increasingly attractive in my eyes. This diversified communications provider trades at just 9-times forward earnings. Meanwhile, 2023 projections call for 15% revenue growth and over 100% earnings expansion. Comtech is also seemingly at an inflection point this year. For the first time since 2019, its losses are narrowing, and sales are rising. Its dividend also yields a healthy 3.2%.
Momentum is accelerating, and I believe the risk-reward trade-off now favors bullish investors. Of course, the macro climate poses challenges. But if trends continue, CMTL stock appears poised to deliver further shareholder value.
Bancolombia (CIB)
Bancolombia (NYSE:CIB) has languished amid rising risks in Latin America, with many noting economic and political concerns in the business’ home country of Colombia. However, I believe these fears are overblown, with Colombia’s inflation coming under control and the political scenario changing positively compared to 2021.
The stock itself has been trending upward recently, and I believe the trend can continue, considering how cheap this growth stock is. Currently, CIB stock trades at less than 5-times earnings, and its dividend yield is nearly in the double digit range, too. Despite some deterioration in its loan portfolio, Bancolombia boasts impressive profitability, with a return on tangible equity of 28% this past quarter. Factoring ongoing improvements in the cost of risk, net interest margin (NIM) growth, and operating leverage, I expect the bank to deliver robust earnings in 2023.
Thus, as the negativity abates, Bancolombia should attract investor interest once again. In my opinion, the company’s current discount offers substantial upside for patient and long-term shareholders. Of course, Latin American risks do persist, but the bank seems well-positioned. Ultimately, I’m of the view that these fears are overblown relative to Bancolombia’s actual financial strength.
Cinemark (CNK)
This stock also hasn’t been having the prettiest of quarters recently, but it also seems like a good bet, considering the fact that the business has been transitioning for the better. It is currently trading around 65% off its peak, and I believe it can pull off a full recovery back and beyond its pre-pandemic levels. Unlike meme stocks like AMC (NYSE:AMC), Cinemark (NYSE:CNK) is profitable and is expected to grow these profits in the long run.
The company’s forward price-earnings ratio sits at 11-times, with revenue growth expected to be 25% this year. That is quite cheap. I believe higher growth is possible, as it beat earnings per share estimates by 48% in the latest quarter, and can continue that trend. My optimism is justified by strong recent execution, I expect substantial operating leverage and margin expansion as attendance recovers further over the next couple of years.
Omor Ibne Ehsan is a writer at InvestorPlace. He is a self-taught investor with a focus on growth and cyclical stocks that have strong fundamentals, value, and long-term potential. He also has an interest in high-risk, high-reward investments such as cryptocurrencies and penny stocks. You can follow him on LinkedIn.
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