In this article, we take a look at 12 best growth stocks to buy for the next 5 years.
There are different definitions for growth stocks. For this article, we define high growth as a stock with an EPS next 5 year ratio of over 10%.
Considering a stock can have a high EPS next 5 year ratio by starting off with a small profit base, the best growth stocks also have other compelling characteristics such as competitive advantages, long term growth potential, and ideally a history of profitability. For those of you interested, check out 12 High Growth NASDAQ Stocks That Are Profitable.
In terms of the next 5 years, one of the biggest growth sectors will likely be AI given how transformative the technology could be.
According to Goldman Sachs, generative AI alone could eventually increase global GDP by 7%. Specifically, analysts at the investment bank said, “The boost to global labor productivity could also be economically significant, and we estimate that AI could eventually increase annual global GDP by 7%” although the exact timing and the exact effect size could be difficult to estimate according to the analysts.
To put the 7% number into perspective, global GDP was $96.53 trillion in 2021 according to The World Bank. According to Statista, the global economy had a GDP of $101.6 trillion in 2022, the first time it surpassed $100 trillion. 7% of $101.6 trillion would be $7.11 trillion, larger than the nominal GDP of Japan. For those of you interested, check out Countries by GDP: 30 Largest Economies in the World.
While the vast majority of the increase in global GDP will benefit various firms throughout the global economy by allowing them to create more goods and services, the leading tech companies that have invested tens of billions into AI and that have one of the three largest cloud computing businesses could also benefit from more demand as well.
Given how fast the AI sector is developing, it is very difficult to pick exact stocks that will do well. One company can lag behind others for a variety of reasons. If the sector is winner take all, there could really only be one or a few companies that do well.
Given the sector is so uncertain, 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 Liam Briese on Unsplash
Methodology
For our list of 12 Best Growth Stocks to Buy for the Next 5 Years, we chose 12 stocks with competitive advantages that have an EPS next 5 year ratios of over 10% according to FINVIZ.com.
Given EPS Next 5 Year Ratio is an estimate, it can change from time to time depending on economic events, company specific events, and analyst view changes.
We also included Amazon.com, Inc. (NASDAQ:AMZN) given it wasn’t profitable for FY 2022 but analysts expect the company to be profitable for FY 2023 and to grow earnings fairly quickly for a company its size over the next 5 years.
We ranked each stock based on the number of hedge funds in our database of 943 funds that owned shares of the same stock at the end of Q4.
For those of you interested, check out 10 High Growth AI Stocks to Buy.
12 Best Growth Stocks to Buy for the Next 5 Years
12. SAP SE (NYSE:SAP)
Number of Hedge Fund Holders: 18
EPS Next 5 Year Ratio: 15.41%
SAP SE (NYSE:SAP) is a leading European enterprise software company with a growing cloud business. At the end of Q4, SAP SE had a current cloud backlog that exceeded €12 billion, up 24% versus the same quarter of the previous year. Cloud revenue also grew 22% for the quarter to to €3.392 billion, of which €907 million were software licenses and €2.993 billion were software support. With its growing cloud business, SAP SE has more predictable revenue and potential for growing earnings. In terms of the future, analysts expect the company to grow EPS by an average rate of 15.41% a year for the next 5 years.
Alongside Alphabet Inc. (NASDAQ:GOOG), Amazon.com, Inc., and Microsoft Corporation (NASDAQ:MSFT), SAP SE is a growth stock that’s owned by many hedge funds in our database at the end of Q4.
11. SYSCO Corporation (NYSE:SYY)
Number of Hedge Fund Holders: 41
EPS Next 5 Year Ratio: 16.16%
SYSCO Corporation (NYSE:SYY) is a leading distributor of food products that’s trading for a P/E ratio of 27.74 and has a dividend yield of 2.55% as of March 31. Largely given an expected EPS rise for next year, however, SYSCO Corporation has an EPS Next 5 Year Ratio of 16.16% and a forward P/E of 16.69, which could be a bargain in the long term if the company realizes its potential. In terms of earnings estimates, SYSCO Corporation has a TTM EPS of $2.77 and an estimated EPS next year of $4.61 according to FINVIZ.com. Although earnings estimates can change all the time given various company and economic developments, SYSCO Corporation has a relatively recurring business with long term growth potential.
10. Chipotle Mexican Grill, Inc. (NYSE:CMG)
Number of Hedge Fund Holders: 42
EPS Next 5 Year Ratio: 24.88%
Chipotle Mexican Grill, Inc. (NYSE:CMG) is a Mexican burrito restaurant with an EPS Next 5 Year Ratio of 24.88% as a result of having a lower EPS base given its P/E ratio of 52.15. Considering the lower EPS base, it is easier for the company to grow its earnings per share. While its valuation is premium priced and the company’s demand could weaken in the near term if there is a recession, Chipotle Mexican Grill, Inc. has long term growth potential given it doesn’t franchise and the company hasn’t expanded very much internationally as compared to in the United States.
Of the 943 hedge funds in our database, 42 owned shares of Chipotle Mexican Grill, Inc. at the end of Q4, ranking the stock #10 on our list of 12 Best Growth Stocks to Buy for the Next 5 Years.
9. Yum! Brands, Inc. (NYSE:YUM)
Number of Hedge Fund Holders: 48
EPS Next 5 Year Ratio: 10.90%
Yum! Brands, Inc. (NYSE:YUM) is another restaurant chain that ranks among the stocks with EPS Next 5 Year Ratios of more than 10% according to FINVIZ.com. Yum! Brands, Inc. develops, operates, and franchises quick service restaurants such as KFC, Taco bell, and Pizza Hut. In terms of growth, Yum! Brands, Inc. is opening more stores. In Q4 2022, the company opened 1,830 gross new units to end the year with 4,560 gross units opened for the full year. Around 90% of the new store openings occurred outside the United States.
8. Blackstone Inc. (NYSE:BX)
Number of Hedge Fund Holders: 51
EPS Next 5 Year Ratio: 10.34%
Blackstone Inc. (NYSE:BX) is the world’s largest alternative asset management firm that has faced near term headwinds given higher interest rates and the weaker broader market. The company has an EPS Next 5 Year Ratio of 10.34% largely because it has a small earnings base given its P/E ratio of 36.21. While the company’s near term is uncertain and could have more downside, Blackstone Inc. is attractive long term given its strong brand name and normalized earnings power. Analysts expect the company’s EPS to grow and the financial giant has a forward P/E of 13.69.
51 hedge funds in our database owned shares of Blackstone Inc. at the end of Q4, down from 61 at the end of Q3.
7. ASML Holding N.V. (NASDAQ:ASML)
Number of Hedge Fund Holders: 59
EPS Next 5 Year Ratio: 29.80%
ASML Holding N.V. (NASDAQ:ASML) has an EPS Next 5 Year Ratio of 29.80% in part given its smaller EPS base considering its P/E ratio of 44.03. While the EPS Next 5 Year Ratio doesn’t accurately reflect the company’s growth, ASML Holding N.V. nevertheless has long term growth potential given it is at least several years ahead of its competitors in making equipment that are essential for the manufacture of advanced semiconductors which power many modern devices. For full year 2022, ASML Holding N.V.’s net sales rose 14% year over year to €21.2 billion with EUV system sales rising 12% year over year to €7 billion.
6. NextEra Energy, Inc. (NYSE:NEE)
Number of Hedge Fund Holders: 61
EPS Next 5 Year Ratio: 10.21%
NextEra Energy, Inc. (NYSE:NEE) is a leading utility that ranks #6 on our list of 12 Best Growth Stocks to Buy for the Next 5 Years given 61 hedge funds in our database owned shares of the stock at the end of Q4. By comparison, 73 hedge funds in our database owned shares of the company at the end of Q3.
NextEra Energy, Inc. has a EPS Next 5 Year Ratio of 10.21% also in part because it has a smaller EPS base considering its P/E ratio of 36.65. Nevertheless, the company has had a history of growth in the last decade. NextEra Energy, Inc. CEO John Ketchum said in January, “Over the past 10 years, we have delivered compound annual growth and adjusted EPS of roughly 10% for our shareholders.” While future growth could be slower, the company has medium term growth potential given the expected increase in regulatory capital employed.
Like NextEra Energy, Inc., Alphabet Inc., Amazon.com, Inc., and Microsoft Corporation are growth stocks owned by many hedge funds in our database at the end of Q4.
5. The Walt Disney Company (NYSE:DIS)
Number of Hedge Fund Holders: 99
EPS Next 5 Year Ratio: 20.64%
The Walt Disney Company (NYSE:DIS) is an entertainment giant that has softer earnings currently partly as a result of the high inflation and streaming losses due to the company trying to grow Disney+. For full fiscal year 2022, The Walt Disney Company’s direct to consumer business, which includes Disney+ and ESPN+, lost around $4 billion. As a result of the lower earnings base, The Walt Disney Company has an EPS Next 5 Year Ratio of 20.64% which overstates the company’s growth potential. Nevertheless, The Walt Disney Company is still a long term growth stock given Disney+ is expected to be profitable by the end of fiscal year 2024.
4. Salesforce, Inc. (NYSE:CRM)
Number of Hedge Fund Holders: 117
EPS Next 5 Year Ratio: 18.01%
Salesforce, Inc. (NYSE:CRM) is an enterprise software company with a substantial cloud business that has in recent months laid off around 10% of its workforce and is reportedly considering further job cuts according to Bloomberg on March 24. Given its strong cloud business and substantial scale, Salesforce, Inc. had free cash flow of $6.3 billion for fiscal 2023, up 19% year over year. With growing demand, analysts expect the company to grow EPS in the future.
117 hedge funds in our database owned shares of Salesforce, Inc. at the end of Q4, ranking the stock #4 on our list of 12 Best Growth Stocks to Buy for the Next 5 Years.
3. Alphabet Inc. (NASDAQ:GOOG)
Number of Hedge Fund Holders: 152
EPS Next 5 Year Ratio: 15.51%
Alphabet Inc. is a tech giant with an EPS Next 5 Year Ratio of 15.51% which might be too high given the increasing competition from the AI powered Bing if the company doesn’t successfully innovate and adjust. Although AI makes mistakes, many users still find the AI powered Bing useful. According to SimilarWeb, Bing has a 2.98% market share and Google has a 90.88% market share as of January 2023. If Bing begins gaining market share, Google could begin losing market share and Alphabet Inc.’s stock could face headwinds, making it one of the riskiest stocks on our list.
On the other hand, Alphabet Inc. is one of the leaders in AI which hasn’t released much of its AI technology for various reasons. In the coming year, Alphabet Inc. has said it plans to launch some of its products.
2. Amazon.com, Inc. (NASDAQ:AMZN)
Number of Hedge Fund Holders: 240
EPS Next 5 Year Ratio: N/A
Amazon.com, Inc. is an e-commerce and cloud computing leader that wasn’t profitable for FY 2022 in part given substantial investment spending and the effect of high inflation on the company’s growth. Nevertheless, analysts expect earnings of $1.46 per share for FY 2023, $2.53 per share for FY 2024, and $3.66 per share for FY 2025 according to Barron’s.
As a result of the expected earnings growth and 240 hedge funds in our database owning shares of the stock at the end of Q4, Amazon.com, Inc. ranks #2 on our list of 12 Best Growth Stocks to Buy for the Next 5 Years. In the long term, Amazon.com, Inc. could also benefit from the increase in AI processing with more potential demand for its cloud computing business.
1. Microsoft Corporation (NASDAQ:MSFT)
Number of Hedge Fund Holders: 259
EPS Next 5 Year Ratio: 11.90%
Microsoft Corporation ranks #1 on our list of 12 Best Growth Stocks to Buy for the Next 5 Years given 259 hedge funds owned shares of the software giant at the end of Q4.
Although Microsoft Corporation’s EPS Next 5 Year Ratio of 11.90% might overstate its actual growth potential in the next half decade given its smaller EPS base considering its P/E ratio of 31.58, the company is a growth stock given its AI potential. While AI still mistakes now, it is improving and the increases in AI processing could benefit Microsoft Corporation’s cloud business.
Microsoft Corporation CEO Satya Nadella said in January 2023, “And as customers select their cloud providers and invest in new workloads, we are well-positioned to capture that opportunity as a leader in AI. We have the most powerful AI supercomputing infrastructure in the cloud. It’s being used by customers and partners like OpenAI to train state-of-the-art models and services, including ChatGPT.”
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This article is originally published at Insider Monkey.
