Macroeconomic trends have rocked Wall Street in recent weeks, with investors concerned about the debt ceiling and talking about rising interest rates.
These are legitimate concerns that should not be dismissed. If things don’t play out in the script, entire swathes of the economy, including high values like tech stocks, could be affected.
But not all businesses will be hit equally, and some stocks look well positioned to thrive even as interest charges become a bigger issue in the years to come.
Here’s why three Fool.com contributors think Trex (NYSE: TREX), Axon Enterprise (NASDAQ: AXON), and Proto labs (NYSE: PRLB) have what it takes to weather any economic turbulence on the horizon.
A good deed to build a portfolio around
Lou whiteman (Trex): Trex, a maker of a composite alternative to wood that is typically used to build decks, has had a tremendous run on Wall Street. The stock has grown over 600% in the past five years. But suitable for a business focused on sustainability, Trex is well set up to continue that growth without putting investors at risk. Even after this climb, the stock looks attractive today.
Trex products are more expensive than lumber, with its basic deck board costing about $ 1.80 per linear foot, compared to about $ 1 per linear foot for lumber. But they last longer and require much less maintenance, making them a compelling value proposition for customers. And the company is slowly expanding its business by providing sustainable alternatives to wood for railings, with involvement in new stadiums in Dallas, San Francisco and elsewhere in recent years.
It is also an ESG stock, manufacturing a product that is a green alternative to wood and benefiting from facilities using recycled water.
Trex, with just over $ 1 billion in annual sales, has only a small portion of the annual market of over $ 6 billion in decking materials. But it has grown its residential business at a compound rate of 16% per year since 2016. And the company is rapidly increasing its capacity, spending more than $ 200 million to build and expand facilities in Virginia and Nevada, which will enable it to increase its production by 70%. % compared to 2019.
The best part of all this growth, from an investor perspective, is that Trex has been able to do it without adding to its balance sheet. The company had less than $ 100 million in total debt at the end of its last quarter, which means its results should not be significantly affected if rates rise.
Demand for Trex products may be affected by a sudden rise in interest rates, but the long-term need for housing will not go away just because rates rise. And in a high-rate environment, the attractiveness of buying a home wanes, which could cause some consumers to stay in their existing home and make upgrades, like adding new decks.
Ultimately, for all the growth Trex has enjoyed, this company is still in the early stages of seizing its market opportunities, and as it grows, it is reaping greater benefits from scale. . Its thearnings before interest, taxes, depreciation and amortization, or EBITDA margin has climbed 260 basis points over the past five years, recently reaching 29%.
Trex offers solid growth and exposure to megatrends in housing and home improvement, all with a secure track record and proven track record. It is an ideal choice for a structurally healthy portfolio.
A breathtaking level of safety and security
Rich Duprey (Axon Entreprise): There has been a name in law enforcement security equipment for years and that is Axon Enterprise. Known initially for its electric pulse tasers, or as they are commonly known, stun guns, Axon has become the owner of the body camera market and increasingly the cloud-based evidence management database market.
Although there is fierce new competition from Motorola Solutions, which has made a full press on large swathes of these same markets, the Axon ecosystem is hard to beat and should give it plenty of room to continue to grow. It’s a large market with room for several players, and Axon looks likely to remain in a leadership position, even in times of market turbulence, which seem to be looming on the horizon.
Rapidly rising inflation, a tight labor market and continued supply chain disruptions are starting to wreak havoc on many businesses, potentially slowing the economic recovery we are experiencing. “Stagflation,” or the rise in inflation and the decline of the economy, is slowly coming back into the lexicon. But for a company like Axon, which has no debt on its balance sheet, it will be able to maneuver with agility if the going gets tough.
Axon, of course, delivers what law enforcement agencies need (and the public demands) by ensuring accountability all around. With its body cameras, officers and the public are protected, its Tasers provide non-lethal force measurements, and its Evidence.com evidence management systems offer efficiency and scalability.
Revenue for the last quarter jumped 55% from the period last year to $ 219 million, with most (52%) still coming from its Taser segment as more agencies across the international markets adopt the platform. This helped it increase the gross profit margin by 550 basis points to 66.4%.
Its cloud segment also saw strong growth of 44% while sensor activity grew 59% year over year.
Perhaps most importantly, annual recurring revenue increased 42%, while net revenue retention increased 119% from the previous year. This is essential because it shows how much the Axon ecosystem becomes ‘sticky’ once an agency adopts its different systems. Since each of the components is integrated with the others, agencies tend to stick to them over time.
Axon’s stock is not cheap by most measures, trading at 94 times next year’s earnings estimates and over 200 times the free cash flow it produces, so I I wouldn’t put all my savings into it. However, as we enter a period of uncertainty, Axon Enterprise offers investors a level of security that its business will not falter if times get tough.
This business is showing profits and growing rapidly without too much debt
Rich Smith (Proto labs): Investors fear of rising interest rates – 1.5% 10-year treasury bills, oh my god! – lowered the stock prices of several growth stocks earlier this week. But here’s the thing about higher interest rates on debt: they don’t matter if you don’t have debt.
My stock pick for this week, contracted 3D printing company Proto Labs, has no net debt. On the contrary, with $ 60 million in the bank and only $ 12 million in debt, according to data from S&P Global Market Intelligence, Proto Labs is in a net cash position. And with $ 37 million in free cash flow, Proto Labs is generating more cash and filling their bank account with every passing day.
Proto Labs’ large free cash flow supports $ 0.90 of every dollar the company reports as net income, indicating very high quality of earnings. In addition, Proto Labs strongly increases its revenues. Analysts polled by S&P estimate that Proto Labs should be able to increase profits by 25% per year – nearly twice the growth rate of S&P 500 – over the next five years.
From a valuation perspective, Proto Labs is not a cheap stock. With a market cap of $ 1.9 billion, the company sells nearly 50 times its free cash flow, a slightly cheaper P / E ratio of 45. That being said, the overall stock market looks a bit red with irrational exuberance right now. Considering that the average S&P 500 stock costs more than 34 times earnings, but only grows 13.3% (hence a PEG ratio of 2.6), Proto Labs stock is at minus one relative boon to its PEG ratio of 1.8.
And if you agree with me that 3D printing is an industry with a promising future, that makes Proto Labs a growth stock to consider buying in times of economic turmoil.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.