Investors may be skeptical about buying a stock that has already generated impressive returns, perhaps worrying that it may be too late to experience gains. But stocks can always hit new highs, especially if their businesses continue to grow.
Two of the best growth stocks you can buy today are Seagen (SGEN) and Salesforce.com (CRM -1.59%). Although they have doubled in value in just five years, the good news is that you can still earn a great return from these stocks even if you invest now.
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1. Seagen
Cancer-fighting company Seagen has been a phenomenal-performing investment over the past five years. With returns of more than 235%, it has soundly beaten the S&P 500 and its 111% gains during that period. But one of the reasons I can still see the stock going even further in the years ahead is the fast growth of the business, and who doesn't love a good growth stock?
Through the first two quarters of 2021, Seagen has reported sales of $720 million, for a staggering year-over-year growth rate of more than 40%. The big knock on the business is that it remains unprofitable, but half of its operating expenses are related to research and development. That type of cost is a bit easier for investors to swallow because it involves investing in the future and bringing new products to market.
For a business like this, I'd argue the more important number is free cash flow. And with Seagen reporting positive free cash flow of $814 million over the trailing 12 months, its financial position suddenly looks a lot stronger. Accounting income, after all, can include non-cash expenses such as depreciation that can make a company's performance look worse than it really is. For that reason, investors shouldn't dwell too much on the bottom line, especially for a company like Seagen that is performing so well on the top line.
Seagen is not only growing well right now but its future looks bright; the company has dozens of trials ongoing for drugs treating various types of cancers. Most recently, the Food and Drug Administration granted accelerated approval for the company's cervical cancer drug, Tivdak. This is "the first and only approved antibody-drug conjugate for the treatment of adult patients with recurrent or metastatic cervical cancer with disease progression on or after chemotherapy."
Overall, Seagen looks to have lots of growth ahead, and that's why investors shouldn't be surprised to see the stock continue to outperform the S&P 500.
2. Salesforce
Tech company Salesforce has produced even better returns for investors over the last five years -- its gains top 300%. But it too is always spending a lot to expand. One of its biggest moves of late was the acquisition of Slack Technologies, which has collaboration tools like group messaging that help businesses (in particular, ones that are on the cloud) stay connected. The acquisition closed in July for nearly $28 billion. For a company like Salesforce that focuses on customer relationship management, it could prove to be a natural extension of its operations.
Salesforce sees it and Slack developing "the future of enterprise software, creating the digital HQ that enables every organization to deliver customer and employee success from anywhere." With more businesses operating remotely than ever before, Salesforce is in an excellent position to meet the growing demand for more flexibility in the workplace.
And what I like about the business is that the company generates more than 90% of revenue through subscriptions and support (the remainder is through professional services). Although support may vary, subscriptions mean recurring revenue, which can minimize volatility and make it easier for the company to grow its top line by building on to its existing customer base. Plus, it means better margins; Salesforce's cost of revenue represents just 25% of sales. That allows it to spend a significant chunk on sales and marketing (more than 40% of its top line) while still posting a profit. Through the first six months of fiscal 2022 (up until the end of June), Salesforce's revenue of $12.3 billion rose by 23% year over year while pre-tax profits of $1.4 billion were up 61%.
The company says that this fiscal year (which ends in January), it's on track to generate $26.3 billion in revenue and in fiscal 2023 the top line will come in at around $31.7 billion. Salesforce is a growth machine and investors shouldn't expect the company to slow down, which is why the stock looks like a safe bet to continue beating the market.
