Stocks

3 Strong Stocks to Consider for the Next 3 Years

Published January 4, 2025

As we approach 2025, I've taken a moment to evaluate three of my most admired stocks from the energy, consumer products, and technology sectors. These are companies I personally own, and they were a primary focus during my time as an analyst at an investment fund.

Each of these stocks presents significant growth potential along with appealing valuations. Being spread across diverse sectors, they also provide a chance to enhance portfolio diversity. I believe these stocks are solid choices for investment over the next three years and likely beyond.

Energy Transfer

Energy Transfer (ET) boasts one of the largest integrated midstream systems in the United States. The company specializes in the transportation, storage, processing, and upgrading of various types of hydrocarbons, including natural gas, NGLs (natural gas liquids), crude oil, and refined products like gasoline. Due to the scale and diversity of its operations, Energy Transfer can exploit many energy arbitrage opportunities. This may involve transporting natural gas to higher-priced markets or converting ethane to ethylene when margins favor it.

Energy Transfer's infrastructure is strategically positioned to meet the increasing energy demands arising from advances in artificial intelligence (AI). It possesses access to inexpensive natural gas in the Permian Basin, recognized primarily for its oil, yet lacking sufficient natural gas takeaway capacity. This situation has created some of the lowest natural gas prices in the country; at times in 2024, prices dipped below $0.

This advantageous position has resulted in numerous inquiries for potential natural gas projects directed at Energy Transfer from power supply companies and data centers. Recently, the company disclosed plans for a $2.7 billion natural gas takeaway project from the Permian that aims to support the growth of power plants and data centers in Texas.

Furthermore, with strong growth prospects ahead, Energy Transfer appears inexpensive relative to its industry peers, trading at an enterprise value (EV)-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio of just 8.4. Comparatively, master limited partnerships (MLPs) traded at an average ratio of 13.7 between 2011 and 2016.

With this blend of growth potential, attractive valuation, and a favorable energy regulatory landscape, I consider Energy Transfer a top stock to hold onto for the upcoming years. It currently offers a forward yield of 6.6% with expectations for distribution growth of 3% to 5% moving forward.

E.l.f Beauty

E.l.f Beauty (ELF) is not only a standout growth story in the consumer sector but also one of the most competitively priced growth stocks out there.

The company has effectively leveraged influencer marketing and techniques to replicate popular products from high-end brands. As a result, its cosmetic products have gained remarkable popularity, particularly among younger audiences. This surge in popularity has enabled E.l.f to capture a significant share of the mass cosmetics market and infiltrate numerous retail spaces.

E.l.f's products are also gaining traction internationally; it has rapidly ascended to become the leading mass cosmetic brand in many countries it has entered, yet there remains vast potential for expansion further.

The company is eyeing growth by venturing into adjacent categories. It has launched two rapidly growing skincare brands: its own E.l.f brand and Naturium, which caters to a slightly higher-priced market segment. Opportunities in the fragrance and hair care sectors also loom large for potential future diversification.

Last quarter, E.l.f reported a staggering 40% increase in sales. Despite this impressive growth, the stock trades at a forward price-to-earnings ratio of 28.5 and a price/earnings-to-growth (PEG) ratio of just 0.5. Typically, PEG ratios below 1 are deemed inexpensive, especially for growth stocks, positioning E.l.f stock as a substantial value play.

Alphabet

In the technology arena, I hold a positive view on Alphabet (GOOGL) (GOOG). The company leads the search market through its Google platform and boasts one of the globe's largest video streaming services via YouTube. These businesses are further supported by a major advertising technology (adtech) division that enhances various services, including Google, YouTube, Gmail, and Maps.

Alphabet's adtech segment is integral in unlocking vast monetization opportunities tied to AI innovations, such as AI Overviews and the Gemini AI app. Historically, Google has monetized about 20% of its search results; however, this could change as new ad formats for AI emerge, allowing the firm to monetize the remaining 80% of search queries.

Additionally, Alphabet is home to the third-largest cloud computing platform, Google Cloud. It is also the fastest-growing among the major cloud providers, with a remarkable 35% revenue growth reported last quarter. Cloud computing is characterized by high fixed costs, and Alphabet appears to be at a critical turning point where it is effectively leveraging these costs, leading to impressive profitability growth. Operating income for this segment skyrocketed from $266 million a year ago to $1.95 billion last quarter.

Alphabet is also developing numerous new ventures, including breakthroughs in quantum computing and progress in autonomous driving via its Waymo unit, which is currently the only service offering paid autonomous taxi rides.

Overall, investors can acquire these expansive opportunities for a forward P/E of just 18.5, further solidifying Alphabet as one of my favored tech investments.

Stocks, Growth, Valuation