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Thursday, February 13, 2014 - 14:30
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Thursday, February 13, 2014 - 14:30

The 3 Best Growth Stocks To Buy On A Pullback

Thursday, February 13, 2014 2:30 PM

Nothing feels worse for investors than missing the boat, and I'm sure there's plenty of regret to go around these days. Stung by huge losses during the financial crisis, so many investors abandoned equities completely and stayed on the sidelines during what has been one of the most impressive stock market rebounds in decades.

But one of the things I've always liked about the stock market is it usually gives lots of second chances. They come in the form of corrections, declines of 10% or more.

Like many market watchers (like my colleague David Sterman, who gave his macroeconomic outlook earlier this month), I strongly suspect we're overdue for a correction because of things like overblown price-to-earnings (P/E) ratios, ongoing economic uncertainty domestically and abroad, and continued investor skittishness. Plus, the market has been showing the kind of increased volatility it often displays right before a major pullback.

If the market does undergo a correction, I encourage investors to see it as a second chance -- possibly a really good one -- to get back into equities.

With the level of mistrust in the stock market still so high, a typical sell-off could easily turn into a major rout. Indeed, I wouldn't be surprised at all to see the S&P 500 shed at least 270 points -- about 15% from current levels -- by early summer.

Such a drop would likely result in much more reasonable valuations for a lot of the high-flying growth stocks most investors dream of owning but have become far too pricey after doubling, tripling or even quadrupling in recent years. I've got several in mind for you to consider, and I think they'd all be especially good to buy on a pullback because they're all positioned for exceptionally fast growth in the future.

1. Himax Technologies (Nasdaq: HIMX)​
Shares of this Taiwan-based semiconductor firm have quintupled in the past 12 months, mainly on recent news of a deal with Google (Nasdaq: GOOG) to provide key components for Google Glass, a wearable computer with a head-mounted optical display. (My colleague Dave Goodboy wrote about his experience with Google Glass and Himax recently.) While the deal may (or may not) substantially boost the company's sales and profits, Himax's main strength is still its core business of producing drivers for large flat-panel displays. It's this business that has enabled the company to more than double annual sales during the past decade, from $300 million in 2004 to $766 million currently. Because the stock is three times as volatile as the broader market, it could drop 30% to around $10 a share even if the market only pulls back 10%. At that price, the P/E ratio would be 29 -- still high but much more reasonable for a growth stock of this caliber.
iStockphoto
Recent Price: $14.40
52-Week Range: $2.85-$15.33
P/E Ratio: 41
Forward P/E Ratio: 22
Projected Earnings Growth Rate (next 5 years): 33%
Target Buy Price: $10​​

2. Gilead Sciences (Nasdaq: GILD)​

A key catalyst for the stock of this large and well-known biotech company has been the hype around Sovaldi, a new drug Gilead recently introduced for the treatment of hepatitis C. Many analysts project the drug could account for additional sales of $1 billion this year. Gilead is also seeking FDA approval for its highly anticipated combination hepatitis C regimen made up of sofosbuvir and the experimental oral drug ledipasivr. As a whole, the company's hepatitis C portfolio could be generating revenue of up to $12 billion annually by 2017, analysts estimate. Gilead has long been pulling in billions each year with its three single-tablet HIV regimens -- Atripla, Stribild and Complera. Although Gilead is a large company with a market capitalization of more than $126 billion, it's still a biotech and its stock can be quite volatile. In a 10% correction, the price could drop as much as 20% to around $65 a share, which would place the current P/E at a more palatable 36 and the forward P/E at a cheap-looking 18.
iStockphoto
Recent Price: $82.20
52-Week Range: $40.83-$84.40
P/E Ratio: 45
Forward P/E Ratio: 22.5
Projected Earnings Growth Rate (next 5 years): 35%
Target Buy Price: $65​

3. Air Lease (NYSE: AL)​
Air Lease, which has a fleet of 174 jets it leases to major airlines around the world, hasn't popped like Gilead or Himax. However, the stock is up 24% in the past 12 months and the P/E is higher than the S&P's P/E of 17. Since 2011, when the stock became available for trading on the NYSE, annual revenue has risen more than twofold from $337 million to $806 million currently. Earnings per share have soared almost threefold, from $0.59 to $1.63. A key to the success of Air Lease has been management's ability to secure reliable sources of cash flow, such as a recent long-term leasing contract with Air France for a Boeing 777 to be delivered in the fourth quarter of next year. The stock is about 30% more volatile than the S&P, so I'd expect it to fall 13% or so if the market corrected 10%. In this scenario, the P/E would shrink to 17 -- very cheap for a stock with Air Lease's growth prospects.
iStockphoto
Recent Price: $32.40
52-Week Range: $25.13-$33.57
P/E Ratio: 20
Forward P/E Ratio: 14.5
Projected Earnings Growth Rate (next 5 years): 31%
Target Buy Price: $28​

Risks to Consider: HIMX, GILD and AL are all higher-risk, closely watched growth stocks. Expect them to be extra volatile. Any revenue or earnings misses could prompt sharp price declines.

Action to Take --> If you have cash on the sidelines, consider reserving some for shares of these three stocks. There will be a major correction sooner or later -- sooner, in my opinion -- and such an event would provide a second chance to buy three fantastic growth stocks at much more attractive valuations. From there, any of these stocks could double or perhaps even triple three to five years down the road.

P.S. An eccentric Texas woman who dodged the 2008 financial collapse also says the market is ripe for a pullback. This is the same analyst who's produced annual returns of up to 510% and has picked winning investments roughly 85% of the time. To learn how she's protecting her portfolio today, click here.

Tim Begany owns shares of HIMX.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.