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2 Growth Stocks With Great Upside Potential

A down August has made it challenging to find growth stocks that fit my investment criteria, but these 2 have tons of upside potential.

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It’s still a bull market, but things have gotten pretty sloppy, with many high-profile growth titles blowing up on earnings (including decisive earnings beats) in the last month. All told, the damage to the market itself has been fairly limited – the S&P 500 is down just over 3% in August, the Nasdaq around 5%. Long term, this pullback is a buying opportunity. But the suddenly pessimistic environment makes it more challenging to really find the growth stocks that fit my investing strategy—which, in a nutshell, is to find the fastest growing stocks with big upside potential that big institutional investors are accumulating.

In fact, going back to when I joined Cabot in 1999, we all used to sit down every six to nine months for a post-op review of all our trades, not just to dissect how we did and where we could improve, but also to test out and track a handful of growth stock picking criteria to see which ones really helped us and which were just OK. (I do something similar these days, but on my own and a bit more informally; I usually write a Lessons Learned article in Cabot Growth Investor near year’s end covering a few new Dos and Don’ts I picked up.)

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Anyway, I remember a couple of things from those older studies on growth investing. One was that stocks that already had six months (or more) of positive relative performance (RP) vs. the market at the time of our buy did better than those that had “only” three to six months of positive RP. Just a heads up when it comes to everyone who’s so eager to buy cheap names—ones that have been uptrending longer tend to do better.

But that’s not the point I wanted to get to, which revolved around what turned out to be our top, most worthwhile growth stock-picking criteria over the many years (even before I started there)—triple-digit sales growth at least in the latest quarter, if not for a few quarters beforehand. And that brings me back to my initial thought: Today, with the market enduring its first real speed bump since March, it’s time to screen for these types of names—you don’t have to settle for stuff like you would in, say, late 2021, but instead, look for the cream of the crop.

To be fair, these days, triple-digit growth is hard to find, at least among growth stocks that have any liquidity or halfway-decent chart patterns. But I still screen for rapid sales growth (and sales growth projections; I prefer 30% or more, the higher the better) to keep up on names that could emerge as leaders once the bull market resumes once this (likely) short-term selling subsides. Here are two of the fastest-growing stocks out there to keep an eye on – either of which could morph into fresh leadership.

Growth Stock #1: Freshpet(FRPT)

Freshpet is a retailer we’ve watched for a while as it disintegrated during the bear market (185 to 36!) and spent the better part of the last year going straight sideways—but now, finally, it looks like the buyers are in control. The story here is simple, powerful and should be very long-lasting: Freshpet is the leader in providing high-end healthy food for pets (mostly dogs), with fresher alternatives that have been shown to boost Fido’s quality of life, which plays into the theme that pets are becoming part of the family.

Its wares are found in something like 26,000 locations, and the firm thinks it’s penetrated just 15% of all dog households and just a quarter of households that order fresh dog food. The biggest issue in recent years came from the company itself, which had supply chain and cost issues during the pandemic all while it was adding capacity to handle growth; it then went on with a series of price hikes in 2021 and 2022 (more than 25% worth!) to counterbalance that, but of course that slowed buying.

But the firm has now gotten a handle on things and all the metrics are pointed in the right direction: Sales (up 26% in Q2, which is the 20th straight quarter of at least 25% revenue growth!) are cranking ahead, and while some of that is from the price hikes, volume growth is actually accelerating (up 18%, 14% and 12% the past three quarters)—and, just as important, margins are improving as all costs (from advertising to logistics to inputs) come under control and more of that should be on the way as a new production plant ramps up. Moreover, while earnings are in the red, EBITDA is positive and growing ($55 million this year likely vs. $20 million last year)—and we like that the top brass is thinking big, aiming for 25% annual sales growth through 2027 while margins leap another few points.

Long story short, Freshpet is a firm that’s always had good demand for its products but had some internal and external (pandemic affecting costs) issues to deal with … but now that management has a handle on those, there shouldn’t be much standing in the way of rapid, reliable growth for many years to come. Our one rub here is liquidity, as FRPT trades $45 million of volume per day, and less liquid names have been subject to some wild moves of late, but we wouldn’t be surprised to see the stock “grow up” as the story reasserts itself.

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Growth Stock #2: Vertiv Holdings (VRT)

One of the issues with the advance of May and June is that so many old, well-known prior leaders were the first that ran—some are still trying to hold up, but new bull phases often thrive from newer names. Vertiv is one of the few newer names that’s shown great power—it’s extended to the upside here, but the numbers are big and the story should persist as it could be a top play in AI infrastructure.

The firm’s product line is all about the data center, with a big part of it revolving around power and thermal management: As chips become more advanced and data centers become more condensed, the need to keep things at a set temperature (for optimum performance of the IT machinery) continues to rise. In fact, the issue is getting to the point where air cooling is reaching limitations, which is boosting demand for liquid cooling methods that are far cheaper and more effective—and where Vertiv has one of the best sets of offerings. While it’s early and hard to track, management believes it already secured tens of millions of dollars of AI-related orders (still a drop in the bucket of the firm’s estimated $6.8 billion in revenue this year), with clear signs of an acceleration in demand coming in the second half of the year.

In the meantime, Vertiv is benefiting from general demand and better margins (supply chain issues are finally easing)—in Q2, organic top-line growth came in at 20% while earnings more than quadrupled and crushed estimates, leading to a big hike in estimates for the rest of the year.

Granted, this is a down-the-food-chain story—if its clients cut back on purchases, Vertiv’s business could dry up in a hurry—but it’s more likely the opposite occurs. The stock has had a monstrous run and was one of the few growth names to gap up on earnings—and it’s held most of its gains even after a share offering. VRT isn’t near an attractive entry point, but we doubt the overall run is over.

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Both of these growth stocks are showing strong business fundamentals and have the potential to become leaders once this new bull market gets back on track. To learn what other growth stocks I’m currently recommending, consider subscribing to Cabot Top Ten Trader, where every week I highlight 10 new stocks that are demonstrating both momentum and positive relative performance.

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A growth stock and market timing expert, Michael Cintolo is Chief Investment Strategist of Cabot Wealth Network and Chief Analyst of Cabot Growth Investor and Cabot Top Ten Trader. Since joining Cabot in 1999, Mike has uncovered exceptional growth stocks and helped to create new tools and rules for buying and selling stocks. Perhaps most notable was his development of the proprietary trend-following market timing system, Cabot Tides, which has helped Cabot place among the top handful of market-timing newsletters numerous times.