Investing for a future second income? Dr James Fox likes these wealth-building stocks
Like many investors seeking to earn a second income from their investments, I’m not at the stage where my portfolio will deliver a life-changing passive income.
As such, my focus for now is on building wealth within the portfolio. That means making monthly contributions, investing carefully in growth-oriented stocks to try to beat the market, and reinvesting any gains to compound.
So, where am I looking to invest?
High-potential stocks
| Company | PEG (FWD) | P/E (FWD) | Revenue growth yoy | Profit margin |
|---|---|---|---|---|
| CommScope Holding Company | 0.98 | 13.21 | 33.82% | 41.06% |
| Innovative Aerosystems | 0.34 | 14.98 | 72.82% | 45.18% |
| Micron Technology | 0.22 | 13.99 | 48.85% | 39.79% |
| Nvidia | 1.01 | 37.79 | 65.22% | 70.05% |
| Sanmina Corporation | 0.64 | 16.18 | 7.4% | 8.81% |
| Seagate Technology | 0.92 | 24.35 | 31.56% | 37% |
You may wonder why I’m suggesting two of the largest companies in the world in Nvidia and Micron are high potential, but it’s not about their size. This is all about relative valuations and where the stocks could be trading at.
The common denominator in this list is the price-to-earnings-to-growth (PEG) ratio. In simple terms, this is a metric that divides the forward price-to-earnings ratio by the expected earnings growth rate for the medium term.
It’s not always accurate, partially because it depends upon forecasts by analysts. Analysts can be wrong, but when we’re using consensus data, and that consensus is built on tens of analysts’ opinions, there’s definitely some credibility.
And for me, it’s one of the best indicators for an undervalued stock. Traditionally a PEG ratio under one was considered an indicator of a cheap stock, but it’s probably best to see it in relative terms. For example, Nvidia is on this list because its PEG ratio is a 40% discount to the IT sector average.
In fact, all these companies trade at huge PEG discounts to the sector average.
Do I have a favourite?
Micron is my largest holding, and Nvidia my second. However, in terms of the stocks I don’t own, I’m finding CommScope Holding NASDAQ:COMM) very interesting.
This $4.6bn company has seen its share price surge 321% over the past 12 months. And when you look at its quarterly earnings reports, that’s not surprising.
In Q1, it delivered twice the earnings the market expected. And this trend continued into Q2 and Q3. Earnings growth for Q4 is expected to be 159% above where it was last year. But we’ve seen these kinds of trends before in the sector.
CommScope delivers infrastructure solutions like connectivity and cables (CCS), for data centres and entertainment networks. There’s so much money being spent on data centres globally right now, but especially in the US.
However, CommScope is actually selling its CCS business to Amphenol for $10.5bn. This should clear the $6.5bn of debt on the balance sheet, potentially resulting in a $3.5bn net cash position ($500m in fees and taxes).
This will leave the business with a healthy balance sheet and two cyclical businesses. These are access network solutions (ANS) and Ruckus — network tech. These two businesses are performing well, with Q2 revenue of $513m, 58% above 2024.
In short, following the CCS sale (due in early 2026), this stock could look very cheap when adjusted for cash.
However, if the deal doesn’t go through, it will be a heavily indebted company relative to its market cap.
The post Investing for a future second income? Dr James Fox likes these wealth-building stocks appeared first on The Motley Fool UK.
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James Fox has positions in Innovative Aerosystems, Micron Technology Inc and Nvidia. The Motley Fool UK has recommended Nvidia. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
