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My favorite growth stocks in these uncertain times


Growth stocks typically trade at higher valuations because investors are willing to pay a premium for growth. However, fears of a slowing global economy as the Federal Reserve raises interest rates to fight inflation have weighed on growth stocks in recent months. Indeed, many businesses may not grow as quickly in the future if they do not have access to the capital they need to grow.

However, this is not a problem for some growth stocks. Companies with plenty of internal financial flexibility — free cash flow and cash on their balance sheets — can continue to fund expansion during these uncertain times. Three of my favorite cash-laden growth stocks are CrowdStrike Holdings (CRWD -5.53%), Clearway Energy (CWEN 0.62%) (CWEN.A)and Prologis (PLD -0.09%).

A massive growth opportunity

CrowdStrike Holdings is a global group cyber security leader with a cloud-based platform. The company’s software-as-a-service business model generates a lot of recurring revenue and cash flow. Revenue rose 61% in its fiscal first quarter to $487.8 million, bringing its total annual recurring revenue (ARR) to $1.92 billion.

The cybersecurity company does a great job of converting its earnings into cash. Free cash flow was $157.5 million last quarter, up 34% year-over-year. It turns every $1 of sale into $0.32 of available cash. That free cash flow pushed the company’s cash balance to $2.15 billion from just $740 million in debt.

CrowdStrike’s financial resources give it the flexibility to continue to grow. It is investing heavily to develop new tools to capture a larger share of the massive and growing Total Addressable Market (TAM) opportunity for cybersecurity. The company’s current product portfolio serves a TAM of $58.3 billion, which it expects to grow to $71.1 billion by 2024. In the long term, the company sees its TAM reaching $126 billion. dollars as the market grows and it continues to launch innovative new products. This allows CrowdStrike to continue to grow at a rapid pace in the years to come, with a goal of $5 billion in ARR by its 2026 fiscal year.

The cash to fuel high-end dividend growth

Clearway Energy is a leading clean energy producer with a portfolio of wind, solar and natural gas power plants. The company generates stable cash flows by selling the electricity produced by these plants under long-term fixed rate agreements. This allows it to pay an attractive dividend which currently yields 3.9%.

The company plans to increase this dividend towards the top of its target range of 5% to 8% through 2026. One of the factors fueling this high-end growth rate is the recent sale of its thermal assets. It received $1.46 billion in net proceeds which it redeploys into higher revenue renewable energy investments.

Clearway has already allocated about 55% of that capital, giving it a clear line of sight to future cash flow growth. In the meantime, he plans to put the remaining money to work in the coming years in revenue-generating renewable energy assets. These agreements are expected to allow the company to steadily increase its cash available for distribution from $365 million this year to more than $440 million in the future. This will allow it to support a constantly increasing dividend. Add to that its higher yield, and Clearway could deliver above-market total returns in years to come.

Integrated growth

Prologis is one of the main owners of logistics real estate. It rents these properties under long-term contracts, which allows it to generate relatively predictable rental income. This helps support its 2.5% dividend.

The company paid $1.2 billion in dividends in the first half of this year versus $1.7 billion in adjusted funds from operations. That leads it to produce about $1 billion in post-dividend free cash flow this year.

Combined with its elite balance sheet, Prologis has great financial flexibility to pursue its expansion. The real estate investment company (REITs) is building additional warehousing capacity around the world. It also recently agreed to acquire another logistics REIT Duke Real Estate in a $26 billion all-stock deal. This transaction will immediately increase its earnings and free cash flow per share.

Prologis also has huge built-in growth due to high demand for warehousing space. Given the long-term nature of its leases, it does not fully capture current market rents. Prologis estimates that its net operating income will grow at an annual rate of more than 8% without further growth in market rents. Add up all of its growth engines and this REIT should be able to continue to grow its dividend at a healthy pace while producing attractive total returns.

The fuel to keep growing

Some growth stocks burn cash. Their engines of growth could run out of fuel if the economy stagnates.

However, this will not be an issue with CrowdStrike, Clearway Energy and Prologis. They have the cash to keep growing in these uncertain times, and they should be able to keep growing their revenue and shareholder value even if the economy turns upside down. This ability to grow under uncertainty is why they are among my favorite growth stocks these days.

Matthew DiLallo holds positions at Clearway Energy, Inc., CrowdStrike Holdings, Inc. and Prologis. The Motley Fool fills positions and recommends CrowdStrike Holdings, Inc. and Prologis. The Motley Fool has a disclosure policy.