Striking a balance between growth and the price you pay can be a recipe for market outperformance. Ideally, you want to buy undervalued growth stocks with low price-to-earnings, price-to-free cash flow, or price-to-book value.
Typically, these growth gems become undervalued due to temporary factors. However, the valuation disconnect doesn’t last for long as the market begins to appreciate its growth, and the multiple re-rates upwards. Moreover, if the company can maintain or accelerate growth, the stock can be a long-term compounder.
The first step is to screen for stocks with higher growth rates than the market. Secondly, the growth rate must be sustainable and not due to one-time factors like an acquisition or price increase. And finally, to maximize your gains, the valuation multiples should be below market multiples. Otherwise, paying too much for even the best growth stocks can hurt your returns.
These undervalued growth stocks had a 5-year revenue compounded annual growth rate (CAGR) above 10%. Additionally, they have a forward price-to-earnings multiple below twenty. And according to Finviz, all will deliver 20% annual EPS growth for the next five years.
SolarEdge Technologies (SEDG)
As electrification, decarbonization, and digitization of electrical networks accelerate, demand for power solutions will only grow. SolarEdge Technologies (NASDAQ:SEDG) produces power optimization and monitoring solutions. The Israel-based company designs and sells inverter systems. Also, it provides smart energy management solutions used in commercial, residential, and utility-scale applications.
Over the past five years, SolarEdge has been a growth engine. Revenues grew by 2%, 34%, and 58% in 2020, 2021, and 2022, respectively. Indeed, sales are accelerating as solar adoption increases and demand for its optimized inverter solution surges. Also, its expansion into energy storage, home energy management, home backup systems, and grid services systems has boosted sales.
In the most recent quarter, SolarEdge shipped a record of more than 3.6GW of inverters. As a result, revenue grew 44% year-over-year (YOY) to a record $943.9 million. And the company grew profitably, posting a GAAP net income of $138.4 million.
The company is experiencing surging global demand, with record solar revenues in South Africa, Germany, Switzerland, France, Austria, and Australia. In the earnings call, management highlighted European residential market strength. They expect the strong momentum to continue.
And although the U.S. market saw negative quarter-over-quarter revenue growth, the market has a huge catalyst. IRA tax credits make SolarEdge one of the most undervalued growth stocks. Management is progressing on plans to start manufacturing in the U.S. They expect to begin producing products in the U.S. by the third quarter.
SEDG stock is inexpensive, considering the record total revenues in the recent quarter. More impressive were sales from the Rest of the World segment, up 30% QOQ. Yet, the stock trades at a forward P/E of 19. Buy the stock to ride the solar adoption wave over the next decade.
Ubiquiti (UI)
Ubiquiti (NYSE:UI) specializes in networking and wireless communication products. The company designs and manufactures various networking devices, including wireless access points, routers, switches, security cameras, and network video recorders, and offers software-defined networking solutions.
It provides reliable and affordable networking solutions offering advanced features and centralized management capabilities. The company’s products are popular for small-scale and enterprise-level deployments.
Over the last decade, Ubiquiti grew revenues from $320 million in FY2013 to $1.69 billion in FY2022. Internet users worldwide grew from 2 billion in 2010 to 5.3 billion in 2022. Due to the increased usage, Ubiquiti achieved a 14.17% revenue CAGR over the past five years.
The growth isn’t over. Current internet users represent about 60% of the global population. Statista expects users to grow to 6.19 billion by 2028.
Going by these growth estimates, Ubiquiti is one of the best growth stocks to buy. Demand for its hardware and network management solutions will increase. As the 3Q fiscal year (FY) 2023 showed, the company is executing flawlessly. Revenue grew 27.8% YOY to $457.8 million. Meanwhile, GAAP net income was $98.6 million, a 95.8% YOY increase driven by higher revenues and higher gross profits.
You can also expect healthy EPS growth from higher revenues in the next few years. Additionally, the company has been an aggressive buyer of its stock. Share count has fallen from 71.4 million by the end of FY2019 to 60.4 million in the latest quarter. Its buybacks will be accretive to earnings.
Considering the expected internet usage growth, Ubiquiti is a bargain at a forward P/E of 19.31. According to Finviz, annual EPS will exceed 20% in the next five years. And as a bonus, shareholder-aligned CEO Robert Pera owns over 90% of the common stock.
Sketchers (SKX)
There are several undervalued growth stocks to buy in the consumer discretionary sector. After 12.30% annual sales growth in the last five years and at a forward P/E of 13 Sketchers (NYSE:SKX) deserves a look.
Sketchers is the third-largest global footwear brand by sales. It operates in two segments: wholesale and direct-to-consumer. The wholesale segment sells to a wide range of partners, such as departmental stores and sporting goods retailers. In addition, they sell their footwear directly to consumers through their approximately 1,443 company-owned retail stores and over 3093 distributors, licensees, and franchise stores.
Given its vast global distribution network, the company will likely maintain its growth. In FY2022, Sketchers grew sales by 18% YOY. The increase was from volume growth as well as price increases.
From now on, the international market represents a huge opportunity. As 1Q 2023 illustrated, it will be the main growth driver. Total revenues grew 10.0% YOY, and international delivered stellar revenue growth up 21.1%. In contrast, domestic sales dropped 4.8%.
Regarding overall revenue growth, management reiterated its revenue goals for 2026. “We remain confident in our strategy and our ability to achieve $10 billion in sales by 2026.” stated John Vandemore, Chief Financial Officer. Based on FY2022 sales of $7.4 billion, that represents a 7.6% CAGR.
Profits will also improve as supply chain challenges ease. In 2022, the cost of sales grew 22% YOY, faster than sales. Meanwhile, operating expenses increased by 18% due to additional distribution and labor costs related to supply chain challenges.
As these cost pressures ease and the company develops its direct-to-consumer business, margins will improve. These improvements, plus revenue growth, will lead to an increase in SKX stock.
On the date of publication, Charles Munyi did not have (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.