The raging bull market has caused shares of many growth stocks to soar to nosebleed valuations. However, even in times like these, there are bargains to be found if you're willing to do a bit of digging.
So which growth stocks do I think are safe buys right now? Manhattan Associates(NASDAQ: MANH), Tucows(NASDAQ: TCX), and Coherent(NASDAQ: COHR) are three of my choices.
On a chalkboard, a hand draws an upward-sloping arrow over a row of increasingly larger dollar signs.
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To the cloud
You've probably never heard of Manhattan Associates, but the odds are good that you've benefited in a small way from its supply chain management solutions. The company helps some of the largest companies in the world -- think Papa John's, Whirlpool, and McKesson -- to optimize their supply chain so they can get their products to the right place at the right time.
Manhattan's business might not be sexy, but the company's services are mission-critical for its customers. What's more, managing a global supply chain is complex, so business has been booming for years. As a result, long-term shareholders have crushed the return of the S&P 500 over the past decade.
However, Manhattan's stock has languished in recent years because of two primary factors. First, a lot of Manhattan's customers are retailers. Given the rapid industry changes, a lot of them have been holding back on spending. Second, the company is shifting away from its legacy licensing business and is transitioning to a cloud-based model. While that shift hurts results in the short term -- and hence has depressed its revenue, net income, and stock price -- it sets the company up for great growth over the long term.
I've seen this same story play out time and time again with the likes of Microsoft, Adobe Systems, Autodesk, and Oracle. These companies all saw their share prices languish or fall when they announced that they were focusing their business more on the cloud. In each case, their stocks came roaring back to life after Wall Street saw that the transition was gaining traction.
I think the same dynamic will play out with Manhattan Associates' stock in time. Now that Manhattan's stock is on sale -- shares have fallen by more than 44% from their all-time high -- I think now a great time for opportunistic investors to get in.
The short sellers are wrong
Tucows has three growth businesses under one roof. First, it owns one of the largest internet-domain registration businesses in the world -- and it recently became a whole lot bigger thanks to a massive acquisition. Second, Tucows operates a discounted-mobile-phone service in the U.S. called Ting. Third, the company has a fast-growing fiber internet business.
All three of these businesses have grown quickly in recent years and hold tremendous long-term potential, but Tucows stock has been under a huge amount of selling pressure recently. Why? You can primarily place the blame on a short attack.
Man in a suit using a magnifying glass to look at a piece of paper
Image source: Getty Images.
Short sellers accused the company of all kinds of shenanigans, but their main point was that one of the company's recently acquired customers is taking its business elsewhere. That decision will cost the company over 3.2 million domain names, which represents a decent chunk of its overall business.
At first glance, this news seems troubling, but I've learned to take short sellers' reports with a grain of salt, since they are often wrong and can be highly misleading. In this case, Tucows' management team has stressed that they were aware the customer was going to move its business before the acquisition took place. In fact, management thought the transition was going to occur earlier, so there were "absolutely no surprises here," said Tucows CEO Elliot Noss.
While Tucows has recovered a bit from its plunge after the short attack become public, the stock still remains well off its 52-week high. Now that shares are trading for less than 20 times forward earnings, it's a great time to buy into this long-term growth story.
A small hiccup in a long-term growth story
Laser maker Coherent had been on a heck of a run in recent years. Wall Street was very bullish on the company's decision to acquire competitor Rofin-Sinar last year. The move was expected to create a laser powerhouse and drive years of profit growth.
That's largely been the story thus far, but Wall Street has recently turned negative on the company's stock. Reports have surfaced recently that demand for the new iPhone, and OLED screens in general -- which Coherent's lasers help to manufacture -- have been weak. In addition, currency movements are expected to ding margins. The combination caused traders to send the stock down more than 30% from its recent high. The drop has pulled the company's forward P/E ratio all the way down to 12, which is dirt cheap.
Laser system cutting shapes out of metal
Image source: Getty Images.
With a valuation that low, you might assume that Coherent's growth is about to come to a screeching halt. In fact, the opposite looks to be true. Demand for the company's products was strong across the board and shows no sign of slowing down. Management actually expects 2018 to be a "record-setting year" and is investing now to add capacity into 2019.
In spite of Wall Street's lowered near-term outlook, analysts still see great potential for this business as it realizes the benefits of the merger. Profits are expected to grow 35% annually over the next five years, which is a terrific growth rate for such a cheap stock.
The Foolish bottom line
While true bargains are few and far between in today's market, I think Manhattan Associates, Tucows, and Coherent all stand out as attractive growth stocks today. I'm a shareholder of all three companies, and I plan on sticking with each of them for the long term.
Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Brian Feroldi owns shares of Adobe Systems, Coherent, Manhattan Associates, and Tucows and has the following options: long January 2020 $38 calls on Oracle and short January 2020 $38 puts on Oracle. The Motley Fool owns shares of and recommends Tucows. The Motley Fool owns shares of Coherent and Oracle. The Motley Fool recommends Adobe Systems, Manhattan Associates, and McKesson. The Motley Fool has a disclosure policy.
