Growth Stock Blueprint


The Latest Growth Stock Alert

The Latest Growth Stock Alert

Chris Dios - May 20, 2020

PagerDuty, Inc. (NYSE: PD)

For this week’s Growth Stock Blueprint Alert, we will be looking at PagerDuty, Inc. (NYSE: PD), which is a company that operates a platform to receive digital signals from software-enabled devices and combines them with human response feeds. This allows companies to better orchestrate in team-based environments and make the right cooperative decisions in real-time.

PagerDuty operates both in the United States and around the world to provide advanced analytics for incident responses, event intelligence, business visibility, and on-call management. These solutions help address the requirements of corporate management in their digital operations and these are the types of companies that are designed to weather the effects of a COVID19 economy.

PagerDuty serves clients in several different industries, financial services, telecommunications, travel, retail, hospitality and travel, and media/entertainment. PagerDuty has its headquarters in San Francisco, California and the company has been in operation since 2009. At current share price valuations, PagerDuty is trading with a market cap of $1.95 billion.

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  • Corporate Revenue versus Market Revenue: PagerDuty’s revenue growth of 18% per year is expected to grow at a rate that is faster than the averages seen in the U.S. stock market (under 9% per year).
  • PagerDuty’s revenue is expected to grow at a rate of almost 19% per year. 
  • PagerDuty’s revenue figure increased by an incredible 41% during the last year.

Recent stock market volatility has left investors in a highly precarious position as small-cap stocks in the Russell 2000 have underperformed the large-cap counterpart S&P 500. However, the Russell 2000 is notorious for its broad multitude of flaws and it should be remembered that this is not a reflection of the entire small-cap market environment.

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  • Cash Runway Stability: PagerDuty has a cash runway that is considered to be sufficient for at least three years based on the company’s current levels of free cash flow. 
  • Cash Runway Forecasts: PagerDuty has a cash runway that is considered to be sufficient for at least three years because the company’s rate of growth in free cash flow continues expanding at rates of 44% per year.

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  • Short-Term Debt Liabilities: PagerDuty’s short-term corporate assets of roughly $405 million surpasses the company’s short-term debt liabilities (at about $115 million). 
  • Long-Term Debt Liabilities: PagerDuty’s short-term corporate assets (of roughly $405 million) also surpasses the company’s long-term debt liabilities (at about $12.4 million).

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  • Corporate Debt Levels: PagerDuty is considered to be a company that has a strong debt profile because the company is currently debt-free. 
  • Debt Reduction: PagerDuty is also considered to be a company with a strong debt profile because PagerDuty hasn’t had debt in the last five years.

This is why we focus only on companies that have strong fundamentals and the ability to continue performing well in a post-COVID19 economy. PagerDuty is one example of a company that is capable of roaring back in the event that we continue to see a recovery in the market. PagerDuty has a lot of strength in its underlying businesses, which are characterized by favorable fundamentals and an expanded client base in addressable markets.

All of this gives PagerDuty the ability to grow its revenue figures at an increasingly faster rate of speed. S&P 500 companies tend to have large reserves of cash to access in the event of a market downturn. Small-cap growth companies, in many cases, do not have access to the same resources and this can make them more vulnerable to economic downturns.

However, the advantages found when dealing with small-cap stocks stem from the fact that growth companies like PagerDuty have already shown an ability to deliver on the market’s high expectations for growth. This can lead to strong rebounds following instances of economic downturn and this puts PagerDuty shares in a great position to produce gains when taking long positions near current price levels.

PagerDuty’s incidence management platform has quickly emerged as a leading offering for solutions in digital operations. PagerDuty’s software-as-a-service (SaaS) allows companies that use specific functionalities (i.e.on-call scheduling and reliable notifications) to detect infrastructure issues and make sure they are fixed.

PagerDuty’s platform also enables IT professionals and web developers to resolve incidents that impact the business while ensuring that a proper customer service infrastructure can give customers the best experience. Using these tools, clients are able to manage events impacting the company’s IT environment and the overall experiences of customers. PagerDuty’s customizable notifications can be sent using SMS messages, emails, or phone calls.

PagerDuty initially went (at under $25 per share) in April 2019. Over the next fiscal year, PagerDuty was able to report incredible adjusted gross margins (above 85%) and available cash of more than $350 million. PagerDuty now works with nearly two-thirds of the companies in the Fortune 100 companies.  Even better, PagerDuty can also name nine companies in the Fortune top 10 as its clients. 

PagerDuty’s platform aims primarily to accelerate general efficiencies for businesses in managing digital operations in any enterprise. During the fiscal year 2020, PagerDuty’s revenue increased by more than 40% on an annualized basis (to reach above $116 million). Even more impressive is the company’s customer retention rate is currently above 90% and PagerDuty’s average revenue for each client has seen gains for three straight quarters. 

Over the next few years, it is widely expected that companies continue spending more money on needed digital transformations, and this trend is especially true now that the work-from-home market has become so important for maintaining strength in the broader economy. In the next decade, these are trends that are expected to explode and growth stock investors can still capitalize on these events while they are in their earliest stages.

As long as businesses need to increase system security while providing greater access to customer service employees, broader demand for PagerDuty’s digital operations management platform should continue to grow. Currently, PagerDuty’s stock is experiencing declines on a YTD basis and this offers growth investors an excellent opportunity to establish long positions at favorable levels. 

Shares of PagerDuty stock are currently trading at levels that give the company a forward price to sales (P/S) ratio of just 3.5x, which is far below many of its competitors in the technology industry. Over the next two years, PagerDuty’s revenue growth is expected to above 23%, which is not the type of trend most company’s are likely to experience during this time frame. So while nobody can predict exactly how the COVID19 pandemic will impact the broader market, small-cap growth investors can still view companies like PagerDuty as strong contenders for outperformance.

Key Stock Technical Analysis: PagerDuty, Inc. (NYSE: PD)

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PagerDuty is currently facing several near-term tailwinds that could help to propel the company’s share prices and the first suitable buy zone for the stock can now be found at $24.40. Trend momentum is clearly directed in an upward move but this small retracement will give small cap growth investors a more favorable valuation to used when establishing long positions. With the current market environment supportive for additional growth in this emerging company, it seems to be just a matter of time before this stock enters the radar for a larger number of investors in the market.

New Growth Alert is Here!

New Growth Alert is Here!

Larry Davidson - October 4, 2019

Stock markets continue to move forward in recovery mode, as investors deal with the aftermath of what was a highly volatile summer trading period. The SPDR 500 Trust ETF (NYSE: SPY) has moved back toward its record highs, however the same has not occurred in the Russel 2000 small-cap stock index:

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As we can see, even with the recent recoveries inequities, the small-cap stock index is still trading well off of its long term highs. This is not a total surprise, give that small caps tend to be hit much harder by broad market volatility. However, it means that small-cap stocks still have plenty of room to run higher and this puts our small-cap growth stock portfolio in a very strong position to rally into the final months of 2019.

This Week’s Alert: Freshpet, Inc. (NASDAQ: FRPT)

For this week’s growth stock blueprint alert, we will be looking at a company with major potential for disruption in the growing pet food industry.

Freshpet, Inc. (NASDAQ: FRPT) is a company that markets and manufactures fresh, natural products (including refrigerated treats and meals for cats and dogs. Currently, the company’s consumer base is centered mainly in Canada, the United Kingdom, and the United States. Freshpet sells products under its own branding entity (the Freshpet brand) but also distributed products under the Dog Joy and Dognation label.

These products are distributed through various retail channels, which include grocery stores, mass retail outlets, subscription membership clubs, individual stores with a pet specialty, as well as natural food stores.

Freshpet operates its own website (which also functions as a sales distribution channel), and this tends to be the place Freshpet sees its best margins. The company currently has its headquarters in Secaucus, New Jersey, was incorporated in 2004, and trades with a market cap of $1.75 billion.

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Freshpet has quickly become a major disruptor in the booming dog food/cat food market. Sales of the company’s fresh food options (refrigerated) are largely conducted through retail grocery stores, subscription club stores, and specialized pet supply stores. Essentially, the company installs refrigerators in each of these outlet types to make its line of pet food products available to consumer pet owners.

Freshpet derives nearly all its product sales from a broad (and growing) consumer base in North America. Remember, this is a massive market as the retail space in dog food/cat food has quickly grown to reach $30 billion. Even more encouragingly, Freshpet’s sales growth is showing a rate of 6% compounded annually so this shows that we have not yet reached a period of growing maturity for this space in retail.

As of the end of March 2019, the company has already installed refrigerators in over 20,000 facilities (retail stores), and this marks an annualized increase of roughly 10%. At the current rate of expansion, management believes that the company could hit some truly impressive sales numbers in the years ahead. This is not entirely surprising, given the size of the market, its current pace of growth, and the fact that many pet owners are more than willing to spend exorbitant amounts of money on their four-legged loved ones.

As Freshpet continues to grow its consumer base, it looks highly likely that the company will be able to build on its position as an industry disruptor. Freshpet’s growth installment base has been propelled by a renewed focus on its marketing strategy and this has led to some fairly hefty increases in management’s sales projections for the current year.

Current guidance figures show that management expects sales to increase by nearly 25% (and reach $240 million) for the full-year period in 2019. If these sales projections turn out to be true and accurate, this would mark substantial gains of more than 57% from the numbers released in company reports for 2017 ($152 million).

However, this might only be the beginning for this disruptive company. The latest figures show that nearly 90 million American households own pets. Most importantly, consumer surveys show that 95% of those pet owner households view their pets just like they were members of the family.

This means that a huge percentage of American households are likely willing to spend a little extra money in order to keep them healthy and living for an extended period of time. As long as pet owners continue to embrace healthy and nutritional food options for their pets, Freshpet stands to capitalize on a large (and growing) consumer market space.

The most recent surveys also show that there are more than 300 million pets just in the United States alone, which is nearly as many potential customers as the country’s human population. That suggests Freshpet still has plenty of room to expand (and to match management’s aggressive expectations for sales growth in the years ahead).

Company Financials – Freshpet, Inc.

Freshpet’s earnings growth has already shown strong trends in relation to the retail food industry as well as the activity seen in the broader market:

  • Analysts expect earnings growth at Freshpet to exceed U.S market averages.
  • Analysts expect revenue growth at Freshpet to exceed U.S market averages.

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  • Current analyst expectations suggest Freshpet’s earnings are likely to grow at significant rates (characterized above 20% yearly).frpt-5
  • These expectations suggest Freshpet is likely to outperform going forward, with annual earnings growth showing the potential to reach 105%.
  • Over the past year, Freshpet outperformed earnings growth in the Food industry (which displayed returns of just 5.4%).

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  • Freshpet’s balance sheet shows the company is capable of meeting its short-term debt commitments using short-term assets and cash holdings.
  • Freshpet’s balance sheet shows the company is capable of meeting its long-term debt commitments using short-term assets and cash holdings.
  • Freshpet’s debt levels (compared to net worth) are just 24.2%, which is satisfactory when compared to the broader market.
  • Five years ago, Freshpet had shareholder equity figures that were negative 5 years ago. This trend to turn positive shows that the company’s management of debt has improved significantly.

Key Chart Technical Analysis – FRPT

In the chart below, we can see that shares of FRPT have been caught in a massive uptrend for an extended period of time:

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In this case, we will be looking to build on the stock’s momentum (rather than viewing its activity as a contrarian buying opportunity). Despite the strength of the massive uptrend, recent selling pressure has nearly sent the stock into oversold territory. This gives us an opportunity to buy shares while these are still trading at an attractive valuation.

Remember, the broader market is still showing some weakness in the small-cap space. But if we see further rallies in the S&P 500, it could help small-cap stocks rally sharply. If this occurs, it will likely be too late to buy into shares of FRPT. Evidence that this stock is still trading under the radar can be found in the fact that 95% of its shares are owned by institutions. This means that just 5% of its shares are owned by individual investors. However, insider buying activity has picked up over the last three months and this is another indication that the time is right to start buying FRPT.