Investing in the stock market often involves tracking prominent indices like the S&P 500, a benchmark composed of 500 leading companies. This index periodically replaces underperforming stocks with promising ones, providing investors a balanced portfolio reflecting market performance. While many opt for passive index funds that mirror the S&P 500, some investors strive to outperform it by predicting future additions to the index. To qualify, companies must be profitable over the trailing 12 months and the most recent quarter, meet a market capitalization requirement, and fulfill other criteria.
Here are three growth stocks that could potentially join the S&P 500 in the near future. Acquiring shares in these companies now might yield substantial long-term gains for patient investors.
E.l.f. Beauty (NYSE)
E.l.f. Beauty, a prominent cosmetics brand, is making waves in the beauty industry, capturing more market share year after year. Despite recent volatility, the stock has managed an impressive 20% year-to-date gain and has soared nearly 1,000% over the past five years. This illustrates the potential for high returns by looking beyond the current S&P 500 constituents.
With a market cap of $10 billion, E.l.f. Beauty is still below the S&P 500’s $18 billion minimum requirement. However, the company’s recent performance suggests it could bridge this gap in the coming years. In the fourth quarter of fiscal year 2024, E.l.f. Beauty reported a 71% year-over-year revenue growth, achieving over $1 billion in net sales for the first time in its fiscal year. This marked the company’s fifth consecutive year of market share gains and its 21st straight quarter of net sales and market share growth. With encouraging fiscal 2025 guidance, E.l.f. Beauty is on a promising trajectory.
Duolingo (NASDAQ)
Duolingo, the popular language-learning app, has recently turned profitable and continues to exhibit strong revenue growth. In the first quarter of 2024, Duolingo reported a net income of $27 million, a significant turnaround from a net loss of $2.6 million in the same quarter last year. The company also recorded a 45% year-over-year revenue growth, reaching 97.6 million monthly active users.
Duolingo’s expansion into additional educational subjects has boosted its appeal, potentially leading to substantial gains for long-term investors. However, the stock has experienced limited momentum since its IPO, currently down 25% year-to-date and up just 19% since 2021. As Duolingo continues to post strong earnings and its price-to-earnings (P/E) ratio declines, its market cap, currently just under $8 billion, could grow significantly, positioning it as a future S&P 500 candidate.
CommVault Systems (NASDAQ)
CommVault Systems, a cloud security company, has shown robust growth despite having the lowest market cap among the stocks discussed. With a market cap of $5.4 billion and a P/E ratio of 32.6, the company’s stock has surged 54% year-to-date and 144% over the past five years.
CommVault Systems has experienced accelerating revenue growth, with a 7% year-over-year increase in fiscal 2024 and a 10% jump in the fourth quarter alone. The company’s focus on subscription revenue is a significant growth driver, with subscription revenue accounting for more than half of total revenue in the fourth quarter and growing by 27% year-over-year. This trend is likely to continue, boosting overall growth rates. Additionally, CommVault is profitable and allocated $184 million to stock buybacks in fiscal 2024.
Despite limited attention from Wall Street analysts, CommVault Systems is rated as a Moderate Buy, with the highest price target suggesting a potential 15% gain to $140 per share.
Key Takeaways
- E.l.f. Beauty: With consistent market share growth and strong financial performance, E.l.f. Beauty is on track to meet the S&P 500’s market cap requirement in the near future.
- Duolingo: The profitable educational app continues to expand its user base and revenue, positioning itself as a strong candidate for the S&P 500 as its market cap grows.
- CommVault Systems: The cloud security firm’s focus on subscription revenue and solid financial metrics make it a promising contender for future S&P 500 inclusion.
Conclusion
Investing in growth stocks that have the potential to join the S&P 500 can offer substantial returns for investors willing to look beyond the index’s current constituents. E.l.f. Beauty, Duolingo, and CommVault Systems each demonstrate the financial strength and growth potential necessary to become future S&P 500 members. By keeping an eye on such promising stocks, investors can position themselves to benefit from the next wave of S&P 500 additions.