The stock market is getting pummeled this year. Growth-focused stocks have gotten hit particularly hard as investors rotate out of that sector. While this sell-off has been brutal to stomach, it's also providing some compelling opportunities for long-term investors.
The sell-off hit the tech sector the hardest, which has captured investors' attention. That's causing many investors to overlook some under-the-radar growth stocks that have also tumbled during the correction. Two that stand out as more compelling opportunities right now are NextEra Energy (NEE 1.87%) and Prologis (PLD 1.30%).
Image source: Getty Images.
A growth stock hiding in a slow-growth sector
Utility stocks tend to be the domain of income investors like retirees because they typically don't grow that fast. However, NextEra Energy isn't your average utility. Over the last decade, it has grown three times faster than other large utilities, powered by its focus on the fast-growing state of Florida and the renewable energy megatrend.
These catalysts have created enormous value for long-term investors. Over the last decade, NextEra has generated a more than 700% total return, doubling the return of the S&P 500.
However, despite its success, shares of NextEra Energy have sold off this year, tumbling more than 20% from its recent high. That's due somewhat to the recent announcement that it is handing the company over to a new generation of leadership, which spooked investors. Because they focused on the leadership change, they missed its accelerating growth rate.
NextEra recently reported its fourth-quarter results, capping off an excellent year where it grew its adjusted earnings per share by 10.4%. Meanwhile, the accelerating growth in renewable energy development boosted its earnings growth outlook for 2022 and 2023. It also extended its forecast out two more years. The utility now expects to deliver double-digit earnings growth in 2022, with 6% to 8% annual earnings from that higher base through 2025.
That outlook is conservative. The company said it would be disappointed if it didn't deliver growth at or near the high-end of its range. Meanwhile, there's upside potential to that long-term forecast if it makes acquisitions or the U.S. passes more legislation to spur additional renewable energy development.
With NextEra's stock down 20%, it's trading at a much more attractive valuation, given its accelerating long-term growth prospects.
Insatiable demand for this real estate
Growth-minded investors also often overlook real estate investment trusts (REITs) because they typically sacrifice growth for income. However, that's not the case with leading industrial REIT Prologis. Demand for logistics properties is red hot these days, enabling the REIT to grow rapidly.
Prologis has grown its cash flow per share at a double-digit compound annual rate over the last five years, including 14% last year. Meanwhile, it sees nearly unstoppable growth ahead as demand for industrial real estate grows. The sector is benefiting from the rapid shift toward e-commerce and a change in inventory management practices due to global supply chain issues.
These demand drivers are pushing up rental rates. Prologis captured 18% higher rental rates as existing leases expired last year. That provides lots of embedded growth because of the long-term nature of its leases. Prologis' existing portfolio has a $1.2 billion net operating income (NOI) growth opportunity at the current market rate for rents. That's meaningful for a company that produced $3.4 billion in NOI last year.
With demand continuing to grow, Prologis estimates rents could surge another 10% this year, providing even more embedded long-term growth upside potential for its legacy portfolio. On top of that, the company can develop more logistics properties to further benefit from fast-rising demand. It has enough land to build $26 billion of new industrial properties, giving it years of growth potential.
Despite this growth potential, shares of Prologis have declined by 10% already this year. That had it trading at a much more attractive value, given the growth still ahead.
Great ways to add new growth drivers to your portfolio
While technology stocks often offer some of the best growth potential, it's not the only sector with growth stocks. NextEra Energy plugged into the renewable energy megatrend, helping power accelerated growth. Meanwhile, Prologis is benefiting from the accelerating adoption of e-commerce and the supply chain issues plaguing other companies to drive outsize growth. With their shares tumbling amid the market sell-off, these under-the-radar growth stocks look like even more attractive long-term buys right now.
