As the old adage goes, with great reward comes great risk – many growth stocks have come crashing back down to earth after failing to live up to the hype. So how do you separate the wheat from the chaff?
The key is to focus on growth stocks with real profitability or a clear path to getting there soon. Companies actually making money and sporting robust margins are far less likely to disappoint. Even better if they operate in industries with long runways for expansion ahead. These “Goldilocks” growth stocks give you the best chance of staying in the green.
With markets staring down another potential correction this year, it makes sense to start stocking up on such A-rated growth names. Let the “profitless prosperity” plays take their lumps when volatility strikes. You’ll be safely positioned in rock-solid companies that can withstand turbulence while continuing to compound shareholder wealth over time.
Then, when Mr. Market inevitably goes on sale, you can pounce on other beaten-down growth gems trading at fire-sale prices. But for now, I believe the smartest move is laying the foundation with these seven growth stocks that still offer gargantuan return potential with a margin of safety:
OSI Systems (OSIS)
OSI Systems (NASDAQ:OSIS) is a compelling growth play in the security and healthcare sectors. It is an American manufacturer of airport security screening systems, medical monitoring devices, and optoelectronic components. It operates in some seriously sticky industries. Security has become paramount with rising crime rates, while healthcare needs are only increasing. No surprise that OSIS stock has been a top performer, rallying over 36% in the past year alone.
This outperformance is backed by fundamentals – Q4 revenue surged 26.3% year-over-year to $373.2 million. Analysts see 19% top-line growth for fiscal 2024 accompanied by a 29% EPS pop. Yet despite this torrid expansion, shares trade at just 17x forward earnings. For a business capitalizing on robust secular tailwinds like heightened security demands, that valuation looks like an absolute steal in my book.
Sure, margins sit below 13% and the balance sheet carries some debt. But with interest rates likely headed lower this year, I expect profitability to improve substantially. This cash-rich cash cow could really start minting money for shareholders. OSIS gives you exposure to must-have products and services in rapidly growing end markets – the exact recipe for market-crushing gains.
Napco Security Technologies (NSSC)
Napco Security Technologies (NASDAQ:NSSC) is another way to play the security megatrend. This company manufactures electronic locks, alarms, access control systems, and other essential equipment for homes and businesses. As crime ticks higher, spending on these protective solutions is naturally outpacing expectations.
Just look at Napco’s latest quarter – revenue beat Wall Street targets by over 8% while EPS topped by a staggering 41%! The top line grew by 12.4% YOY as customers raced to fortify their properties. With crime rising in many places, I see this double-digit growth continuing to outperform. Wall Street models call for revenue to more than double from $191 million to $403 million by 2027, accompanied by 100%+ EPS growth in that timeframe.
Even those lofty projections could prove conservative if societal unrest persists. Yet despite this hypergrowth trajectory, NSSC trades at just 32x forward profits.
Watsco (WSO)
Watsco (NYSE:WSO) is the 800-pound gorilla in HVAC distribution across North America. While not a hypergrowth play, it gives you exposure to the steady compounding power of a market-dominating business. WSO provides heating, ventilation, air conditioning, and refrigeration equipment to contractors – products with reliably recurring demand loops.
The stock has been a stellar performer, delivering consistent returns thanks to its wide moat. Watsco didn’t shine in Q4 as temperatures cooled, but I expect a scorching summer could spark a major rebound if heat waves persist. This is one of the largest HVAC players, after all. Analysts forecast stable sales growth with low double-digit EPS expansion in the years ahead.
That steady appreciation combined with WSO’s 2.66% forward yield makes for a powerful one-two punch. By reinvesting those dividends, investors can turbocharge their returns from this cash-rich compounder. The growth may not be flashy, but Watsco’s resilient business model and market dominance should continue delivering market-beating performances.
O’Reilly Automotive (ORLY)
O’Reilly Automotive (NASDAQ:ORLY) has been an absolute beast, delivering consistent compounding that growth investors dream about. As a leading auto parts retailer catering to both professionals and DIYers, ORLY has multiple megatrends propelling it forward.
The average car age in America is rapidly aging, now approaching 13 years. With interest rates elevated, consumers are postponing new vehicle purchases and keeping their current rides on the road longer. That’s rocket fuel for ORLY’s aftermarket parts business. No surprise the stock has skyrocketed 187% over the past five years, nearly 100% more than the Nasdaq’s performance.
ORLY’s growth runway extends for miles. Analysts forecast around 5% annual sales expansion accompanied by double-digit EPS growth in the coming years. However, with its powerful demographic tailwinds intensifying, I see ORLY blowing past even those rosy projections. This cash-rich juggernaut generates lots of free cash flow to fund expansion and buybacks.
PAR Technology (PAR)
PAR Technology (NYSE:PAR) is a more speculative but intriguing hypergrowth name. This company provides data-driven software solutions for restaurants, aiming to streamline operations and boost guest experiences. While its products lack the stickiness of some peers, PAR’s growth outlook is compelling.
Recent results highlight the momentum, with total annual recurring revenue up 23% year-over-year. PAR’s acquisition of Stuzo and potential TASK deal should further accelerate expansion. The Street expects PAR to reach breakeven around 2025 as adoption increases across its portfolio.
Yes, the stock’s volatility is high – this is a classic “high risk, high reward” play. But if you can stomach the turbulence, PAR’s trajectory could deliver mammoth multibagger gains from today’s bargain levels.
Ingersoll Rand (IR)
Ingersoll Rand (NYSE:IR) has been an industrial stalwart, providing compressors, power tools, and fluid handling equipment to mission-critical end markets. And like a well-oiled machine, this stock has been steadily churning out gains, rallying 60% over the past year alone.
IR’s products enjoy incredible pricing power and sticky demand loops. That’s allowed it to consistently grow earnings – analysts see EPS rising from $3.2 this year to $5.3 in 2027 with around 8% annual revenue growth. IR’s $2.3 billion deal for ILC Dover, a biopharma equipment maker, should provide an additional tailwind.
At 27x forward profits, IR’s valuation isn’t exactly cheap. But for a high-quality industrial compounding machine, that premium is well justified in my view. With its recession-resistant business model and savvy capital allocation, IR looks primed to keep delivering market-beating returns for years to come.
AmpliTech Group (AMPG)
AmpliTech Group (NASDAQ:AMPG) is definitely more of a speculative small-cap play, but one with immense potential upside. This company manufactures custom RF components used in communication systems like WiFi, radar, satellites, and more – essential building blocks as tensions rise globally.
AMPG has been stuck in neutral for some time, but I believe a major breakout could be imminent. The company is expected to post a 125% revenue surge this year followed by 29% growth in 2025, with EPS seen popping 48% the same year. Despite that hypergrowth trajectory, shares trade at just 4x forward earnings – an absolute steal.
With a pristine balance sheet and minimal debt, AMPG has plenty of financial flexibility. If execution remains strong, this overlooked RF play could start receiving the attention it deserves from growth-starved investors.
On the date of publication, Omor Ibne Ehsan 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.