Growth boosts valuation multiples, but it doesn’t always last forever. Companies that cannot maintain it are often penalized with large declines in market value, a lesson ingrained in investors who lost money in tech stocks during 2022.
The risks that can come from buying these assets is precisely why we started StockStory - to isolate the long-term winners from the losers so you can invest with confidence. That said, here are three growth stocks climbing an uphill battle and some other opportunities you should consider instead.
GATX (GATX)
One-Year Revenue Growth: +16.9%
Originally founded to ship beer, GATX (NYSE: GATX) provides leasing and management services for railcars and other transportation assets globally.
Why Does GATX Fall Short?
- Free cash flow margin dropped over the last five years, implying the company increased its investment activities to fend off competitors
- ROIC of 3.8% reflects management’s challenges in identifying attractive investment opportunities
- Short cash runway increases the probability of a capital raise that dilutes existing shareholders
At $169.67 per share, GATX trades at 16.5x forward P/E. Read our free research report to see why you should think twice about including GATX in your portfolio.
Guardant Health (GH)
One-Year Revenue Growth: +39.6%
Pioneering the field of "liquid biopsy" with technology that can identify cancer-specific genetic mutations from a simple blood draw, Guardant Health (NASDAQ: GH) develops blood tests that detect and monitor cancer by analyzing tumor DNA in the bloodstream, helping doctors make treatment decisions without invasive biopsies.
Why Does GH Worry Us?
- Smaller revenue base of $1.08 billion means it hasn’t achieved the economies of scale that some industry juggernauts enjoy (but also enables it to grow faster if it executes properly)
- Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
- EBITDA losses may force it to accept punitive lending terms or high-cost debt
Guardant Health’s stock price of $118.95 implies a valuation ratio of 11.2x forward price-to-sales. Dive into our free research report to see why there are better opportunities than GH.
Collegium Pharmaceutical (COLL)
One-Year Revenue Growth: +19.9%
Pioneering abuse-deterrent technology in a field plagued by addiction concerns, Collegium Pharmaceutical (NASDAQ: COLL) develops and markets specialty medications for treating moderate to severe pain, including abuse-deterrent opioid formulations.
Why Do We Think Twice About COLL?
- Revenue base of $796.3 million puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- Day-to-day expenses have swelled relative to revenue over the last two years as its adjusted operating margin fell by 6.4 percentage points
Collegium Pharmaceutical is trading at $34.07 per share, or 1.5x forward price-to-sales. Check out our free in-depth research report to learn more about why COLL doesn’t pass our bar.
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