The best way to stay invested in a bull market without getting burned in a market crash is to buy growth stocks selling for reasonable prices. If the market remains at elevated levels, investors will eventually search out these companies and bid up their prices. But if the market tanks, these stocks will likely fall less than the market due to their already reasonable prices. Therefore, cautious investors who wish to remain invested should take a closer look at these names.
Global payments toll bridge
The first growth stock is also the best-known of the three. Visa Inc (NYSE:V) grew revenues at an annual rate of over 20% over the last ten years including acquisitions. The company’s enormous network of merchants and cardholders gives the company a wide moat with high growth prospects; since cardholders want cards to be accepted by a large number of merchants and merchants only accept cards that are used by a large number of cardholders, it is nearly impossible to enter the market except through acquisition. Therefore, Visa Inc (NYSE:V) becomes more attractive as it grows, which feeds further growth.
The company earned $8.21 per share over the last four quarters, giving it a trailing earnings multiple of 21 times. In other words, the stock offers a 4.8% initial earnings yield (one divided by 21). But, in addition to a historical double-digit growth rate, Visa Inc (NYSE:V) has a number of tailwinds that make it likely to grow at a high rate for years to come. For one, only 15% of the world’s retail purchases are transacted in cash, including just 50% in the United States and 1% in India. The United States offers significant market expansion in the near term, while developing countries like India offer a long runway for growth in the decades ahead.
Online travel agent
Priceline.com Inc (NASDAQ:PCLN) is one of the world’s largest online travel aggregators, with a strong presence in Europe and Asia. Over the last ten years, the company has grown revenues at an annual rate of 22%, including a 21% year-over-year increase in 2012. Online travel is becoming more competitive than it was when offline travel agents still dominated the market, but Priceline.com Inc (NASDAQ:PCLN) should have plenty of room for growth to justify its trailing earnings multiple of 30.
Like Visa Inc (NYSE:V) — and many other promising growth stocks — Priceline.com Inc (NASDAQ:PCLN) benefits from a network effect; the company’s vast network of hotels, airlines, and other travel providers attracts a large swath of customers, and customers attract more hotels, airlines, etc. to the company. Meanwhile, the company’s primary rivals — Expedia and Orbitz — are concentrated in the North American market, though Expedia is expanding into Asia.
Nevertheless, Priceline.com Inc (NASDAQ:PCLN) continues to dominate the fragmented European and Asian markets and is making prudent acquisitions, like its recent acquisition of Kayak.com. If the company continues to grow at anywhere near the rate at which it grew in the past, then the stock is cheap even at a 3% initial earnings yield.
Scaring the competition away
The final growth stock, Express Scripts Holding Company (NASDAQ:ESRX), is in the process of swallowing an entire industry. After its acquisition of Medco, Express Scripts Holding Company (NASDAQ:ESRX) became the largest pharmacy benefit manager in the United States — with over 1.5 billion prescriptions under management from 100 million members.
Including acquisitions, the company grew sales at nearly 25% per year over the last decade. Although the company will not grow as quickly in the future, it trades at just 10.5 times 2012 free cash flow, so high growth is not necessary to justify the stock price.