The stock market has cooled a bit since the calendar turned to 2024, but last year ended with a bang. Thanks to a year-end rebound, the S&P 500 ended the year with an increase of 24%, and the Nasdaq won 43%. These results made investors feel good, but they also pushed up the valuations of some big companies. The price you pay does matter and some companies seem highly valued.
At some point there will be a sell-off in the stock market, although no one knows when. Some investors like to have a watch list of stocks to buy once prices drop. Here are three growth stocks I'm keeping an eye on adding once the market cools down.
1.Fortinet
Fortinet (NASDAQ:FTNT)a old cybersecurity company With an impressive growth track record, it's at the top of my shopping list. It may not get as many headlines as its flashier peers, but Fortinet has a long history of success in its field.
From initial public offering (IPO) in 2009, Fortinet has been profitable and cash flow positive each year.
The slowdown in revenue and billing growth weighed on Fortinet shares in 2023, with double-digit declines following the release of results for the last two quarters. Management cited a slowdown in a part of the business called Secure Networking. Fortinet believes this is a short-term challenge and expects this market opportunity to continue growing for several years.
Despite the slowdown in growth, third quarter revenue increased 16% and billings grew 6% year over year. The bottom line results were more impressive: earnings per share rose 41%. Even at a slowing growth rate, Fortinet remains a formidable growth company that is a leader in the cybersecurity space.
Even after two big drops in 2023, Fortinet stock is up 28% over the past year, slightly outperforming the S&P 500. This puts its price-earnings (P/E) multiple at 43. While this is below the company's historical average, it certainly isn't cheap. For comparison, competitor cisco systems it trades for just 15 times earnings.
Fortinet is a quality business, but there could be better prices in the future.
2. NVIDIA
For investors following the semiconductor and artificial intelligence (AI) spaces, news on NVIDIA (NASDAQ: NVDA) It has been inevitable over the past year. The last two quarters (Nvidia's second and third in fiscal 2024) have featured triple-digit revenue growth.
This has been led by its data center segment, which saw 279% revenue growth in the third quarter.
At some point, this growth will slow, but it's impossible to know when. According to recent reports from companies that continue to purchase Nvidia's most advanced chips, these impressive increases could be present for the foreseeable future.
In the current quarter, the company projects total revenue growth of more than 200%.
Nvidia currently trades for 75 times earnings and 81 times free cash flow. These multiples are above the company's 10-year historical average. Buying shares at these prices could work if growth projections hold up, but considering the cyclical nature of the semiconductor space, it's reasonable to assume there will be better buying opportunities in the future.
3. Broadcom
Semiconductor device and software developer Broadcom (NASDAQ:AVGO) It has also seen AI-related tailwinds. Over the past year, Broadcom shares are up almost 100% and are currently near their all-time high. The stock now trades at around 35 times earnings and 28 times free cash flow.
When Broadcom reported its fourth-quarter and fiscal 2023 results in December, the market reaction was likely due to guidance rather than reported results. Year-over-year revenue growth slowed to 4% and earnings per share growth fell to 5%. Both growth rates have been significantly higher in recent years.
On the other hand, the company's forecasts suggest that 2024 will be a much better year. Fiscal 2024 revenue is expected to be $50 billion, representing a 39% increase from fiscal 2023 revenue of $36 billion.
The current price and valuation is based on a reacceleration of growth in 2024, due in part to its customers' AI-related spending.
The current price isn't cheap, but it's not incredibly expensive based on Broadcom's historical valuation either. This company should remain at the forefront of the semiconductor and AI space for years to come and should be at the top of investors' watch lists for any market sell-off.
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jeff santoro He has positions in Broadcom, Fortinet and Nvidia. The Motley Fool has posts and recommends Cisco Systems, Fortinet, and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
Three Unstoppable Growth Stocks to Buy If There's a Stock Market Selloff was originally published by The Motley Fool
