In this article, we take a look at 11 high growth high margin stocks to buy.
High margin stocks have higher margins than average by a fair margin.
Generally, maintaining substantially higher than average margins in the long term is difficult given competition.
If there is a new opportunity given a new market or a new technological development, a company that captures that opportunity might have few competitors and high margins temporarily. When more firms join and there is more competition, however, margins can decline. With more competition, the firm might have to spend more on advertising, its costs could increase, or it might have to lower the price of its products, all of which could lead to narrower margins.
While higher than average margins tend to decrease over time given competition, some companies have higher margins than average either for temporary reasons or for more competitive advantage reasons.
Some companies have higher margins for temporary reasons.
If oil prices rise considerably, for instance, some oil companies are going to have higher margins than companies in some other industries simply because oil prices have risen a lot. The same, of course, is also true. If oil prices decline, those companies could have lower margins.
Some companies have higher margins given they have competitive advantages such as strong brands. Because companies like Apple Inc. (NASDAQ:AAPL) have strong brands, they can charge more for their products than companies that make comparable products can. Because they have similar costs and higher price points, companies like Apple Inc. (NASDAQ:AAPL) will have higher margins.
There are different types of margins such as gross margins, operating margins, and profit margins. Although all are important, profit margins are arguably the most important for many investors as EPS can lead to dividends or share buybacks if a company has excess capital and management decides to return the excess capital back to shareholders.
What is high, average, and low margin differs based on industry, time period, and also what type of margin it is. For the stocks listed in this article, we define companies with profit margins of over 15% as having high margin. The average profit margin can vary from time to time but is generally considered around 10% give or take several percentage points. Some might think 20% is high profit margin but everyone’s definition is different.
High Growth
High growth companies have different definitions for different people. For this article, we define high growth as a company where analysts expect the company to grow its EPS by an average annual rate of at least 10% over the next 5 years.
For those of you interested, check out 10 High Growth Low Dividend Stocks to Buy.
The expected growth rate of a company can change depending on where the economy is in the economic cycle.
In terms of where the economy is in the current economic cycle, it is uncertain. Unemployment is low and GDP is growing but the Federal Reserve has raised interest rates considerably and will raise rates further. If the U.S. central bank raises interest rates too much, the economy could slow considerably or even enter into a recession. If the economy slows too much, the broader market could go lower and earnings growth might underperform.
As a result, it could be a good idea for long term investors to own a well diversified portfolio of leading stocks across many different sectors.
Photo by sean pollock on Unsplash
Methodology
For our list of 11 High Growth High Margin Stocks to Buy, we selected 11 stocks with competitive advantages with profit margins higher than 15% and EPS Next 5 Year Ratio higher than 10% according to FINVIZ.com.
EPS Next 5 Year Ratio is the estimated average annual EPS growth rate in the next 5 years.
Since it is an estimate, the EPS Next 5 Year Ratio can change from time to time depending on economic developments, company specific developments, and analyst views.
Given economic and corporate developments, profit margins will also change, sometimes substantially from quarter to quarter given many factors, including potentially one time factors, affect net income. As a result, the profit margins currently may not be what they will be in the future.
We ranked the stocks based on their EPS Next 5 Year Ratio.
11 High Growth High Margin Stocks to Buy
11. Blackstone Inc. (NYSE:BX)
EPS Next 5 Year Ratio According to FINVIZ.com: 10.34%
Profit Margin According to FINVIZ.com: 46.80%
Blackstone Inc. (NYSE:BX) is a leading private equity firm with almost $1 trillion in AUM. Given the company’s substantial AUM, Blackstone Inc. (NYSE:BX) has considerable economies of scale which helps it have high margins. While Blackstone Real Estate Income Trust, also known as BREIT, has experienced some capital outflows with the real estate headwinds in 2022, Blackstone Inc. (NYSE:BX) is still expected to continue to increase its AUM in the future. With the AUM increase, analysts estimate Blackstone Inc. (NYSE:BX) will increase its EPS by an average of 10.34% a year over the next 5 years.
Alongside Mastercard Incorporated (NYSE:MA), Eli Lilly and Company (NYSE:LLY), and ASML Holding N.V. (NASDAQ:ASML), Blackstone Inc. (NYSE:BX) is a high growth high margin stock to consider for potential investment.
10. Yum! Brands, Inc. (NYSE:YUM)
EPS Next 5 Year Ratio According to FINVIZ.com: 10.90%
Profit Margin According to FINVIZ.com: 21.60%
Yum! Brands, Inc. (NYSE:YUM) is a restaurant chain that develops, operates, and franchises quick service restaurants. In terms of its brands, the company operates restaurants under KFC, Pizza Hut, Taco Bell, and The Habit Burger Grill brands. One reason for the profit margin of 21.6% is Yum! Brands, Inc. (NYSE:YUM) does a lot of franchising which can generate higher margins than operating a quick service restaurant. According to Yum! Brands, Inc. (NYSE:YUM), “at December 31, 2020, 98% of our units are operated by independent franchisees or licensees under the terms of franchise or license agreements.” Analysts expect the company to increase its EPS by an average rate of 10.9% a year over the next 5 years.
9. PNC Financial Services Group, Inc. (NYSE:PNC)
EPS Next 5 Year Ratio According to FINVIZ.com: 10.96%
Profit Margin According to FINVIZ.com: 34.80%
PNC Financial Services Group, Inc. (NYSE:PNC) ranks #9 on our list of 11 High Growth High Margin Stocks to Buy given its EPS next 5 year ratio of 10.96%. Considering it is one of the bigger regional banks in the United States, PNC Financial Services Group, Inc. (NYSE:PNC) has fairly substantial scale that helps with its margins. In the fourth quarter, PNC Financial Services Group, Inc. (NYSE:PNC) reported net income of $1.5 billion, down 6% year over year and total revenue of $5.8 billion, up 4% year over year. That’s a profit margin of 25.9%. Profit margins can change substantially depending on how net income changes from quarter to quarter depending on various developments.
8. Microsoft Corporation (NASDAQ:MSFT)
EPS Next 5 Year Ratio According to FINVIZ.com: 11.77%
Profit Margin According to FINVIZ.com: 33%
Microsoft Corporation (NASDAQ:MSFT) is a giant software company with substantial scale which allows it to realize higher margins. A decent percentage of Microsoft Corporation (NASDAQ:MSFT)’s higher margin business is also fairly recurring, which is one reason why the company has a forward P/E ratio of 23.22. Another reason for the premium valuation is that analysts expect Microsoft Corporation (NASDAQ:MSFT) to grow its earnings per share fairly rapidly over the next 5 years given its EPS Next 5 Year Ratio of 11.77%.
7. S&P Global Inc. (NYSE:SPGI)
EPS Next 5 Year Ratio According to FINVIZ.com: 13.10%
Profit Margin According to FINVIZ.com: 29.10%
S&P Global Inc. (NYSE:SPGI) is one of the leaders in the financial data industry which gives it substantial economies of scale. Considering the expected growth in the financial data industry in the future, analysts expect S&P Global Inc. (NYSE:SPGI) to increase its EPS by an average of 13.10% a year over the next 5 years. For full year 2022, S&P Global Inc. (NYSE:SPGI) had revenue of $11.18 billion, GAAP net income of $3.25 billion, and adjusted net income was $3.76 billion.
6. Automatic Data Processing (NASDAQ:ADP)
EPS Next 5 Year Ratio According to FINVIZ.com: 13.43%
Profit Margin According to FINVIZ.com: 18.20%
Automatic Data Processing (NASDAQ:ADP) is a giant in payroll software and services that has helped the company achieve fairly high profit margins. In the second quarter of fiscal 2023, the company had net earnings of $813 million and revenues of $4.4 billion, which is around 18.5% profit margin. In addition to having decent margins, Automatic Data Processing (NASDAQ:ADP) also has an EPS Next 5 Year Ratio of 13.43%.
Like Automatic Data Processing (NASDAQ:ADP), Mastercard Incorporated (NYSE:MA), Eli Lilly and Company (NYSE:LLY), and ASML Holding N.V. (NASDAQ:ASML) are high growth high margin stocks to consider for investment.
5. Visa Inc. (NYSE:V)
EPS Next 5 Year Ratio According to FINVIZ.com: 15.48%
Profit Margin According to FINVIZ.com: 49.20%
Visa Inc. (NYSE:V) is the leader in the financial payments market with substantial network effects. Given there are only a few big competitors, Visa Inc. (NYSE:V) has high profit margins. For fiscal year 2022, Visa Inc. (NYSE:V) had GAAP net income of $15 billion, adjusted net income of $16 billion and net revenues of $29.3 billion. Although the high margins normally attract competition, Visa Inc. (NYSE:V) has nevertheless grown over time given the overall growth in payments. Analysts expect the company to increase its EPS by an average of 15.48% a year over the next 5 years, ranking #5 on our list of 11 High Growth High Margin Stocks to Buy. It remains to be seen whether there will be new meaningful competition in the future.
4. Alphabet Inc. (NASDAQ:GOOG)
EPS Next 5 Year Ratio According to FINVIZ.com: 15.51%
Profit Margin According to FINVIZ.com: 21.20%
Alphabet Inc. (NASDAQ:GOOG) is a company with more competition now in its core market of search given Microsoft has integrated AI into its Bing search engine. Although the AI makes mistakes, Google could potentially still lose market share and its costs could go up. Up to today, search is such a profitable business that Alphabet Inc. (NASDAQ:GOOG) has had high margins for a company its size. Analysts expect Alphabet Inc. (NASDAQ:GOOG) to increase its EPS by an average rate of 15.51% a year over the next 5 years but the market is pricing in slower growth and possibly EPS decreases given the company’s lower valuation.
3. Mastercard Incorporated (NYSE:MA)
EPS Next 5 Year Ratio According to FINVIZ.com: 20.34%
Profit Margin According to FINVIZ.com: 44.70%
Mastercard Incorporated (NYSE:MA) is another leading payments company with high profit margins. In the fourth quarter, the company had net income of $2.5 billion and net revenue of $5.8 billion, giving it a profit margin of 43.1%. Given the expected continued increase in credit card usage, Mastercard Incorporated (NYSE:MA) has an EPS Next 5 Year Ratio of 20.34%. Considering high margins attract competition, it remains to be seen whether there will be any meaningful new competition to Mastercard Incorporated (NYSE:MA). If there is, growth and margins could decrease.
2. Eli Lilly and Company (NYSE:LLY)
EPS Next 5 Year Ratio According to FINVIZ.com: 22.64%
Profit Margin According to FINVIZ.com: 19.90%
Eli Lilly and Company (NYSE:LLY) is a leading maker of medicines that can sometimes have high margins given their pricing. Considering incomes in many emerging market countries are rising, the overall demand for Eli Lilly and Company (NYSE:LLY)’s medicines is expected to increase. In terms of growth estimates, analysts expect the company to increase its EPS by an average of 22.64% a year over the next 5 years and as of 2/25, Eli Lilly and Company (NYSE:LLY) shares trade for a forward P/E ratio of 27.55.
1. ASML Holding N.V. (NASDAQ:ASML)
EPS Next 5 Year Ratio According to FINVIZ.com: 29.80%
Profit Margin According to FINVIZ.com: 26.60%
ASML Holding N.V. (NASDAQ:ASML) ranks #1 on our list of 11 High Growth High Margin Stocks to Buy given its EPS Next 5 Year Ratio of 29.8%. Semiconductors are essential for many of today’s high tech products such as computers and smartphones. With AI processing likely to increase in the future, demand for semiconductors will also increase as a result. Given ASML Holding N.V. (NASDAQ:ASML) is the leader in its sector of the semiconductor production equipment market, the company has fairly high margins as well. ASML Holding N.V. (NASDAQ:ASML) has a forward P/E ratio of 25.15 and a dividend yield of 1.61% as of 2/25.
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Disclosure: None. 11 High Growth High Margin Stocks to Buy is originally published on Insider Monkey.
