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3 of the Worst Growth Stocks of 2018 (So Far)

Nicholas Rossolillo, The Motley Fool

Although it got off to a strong start in January, the U.S. stock market has been volatile for most of 2018. While that has given many stocks fits, some have been hit especially hard -- like those of growing businesses whose shares rose too far too fast. Three such companies are Lending Tree (NASDAQ: TREE), MaxLinear (NYSE: MXL), and Universal Display (NASDAQ: OLED). But just because they're down doesn't mean they're out.

When lenders ask you for business

Bob Hope famously quipped that a bank will only lend to you if you can first prove you don't need the money. Lending Tree has tried to put some of that power back into the hands of the borrower by creating a marketplace where loans from various banks can be shopped and compared. It's done a good job, too, with revenue doubling twice in the last three years.

Lending Tree started out offering mortgages, but the addition of other products like credit cards, auto loans, and student loans has helped take the online finance company to the next level.

It may come as a surprise, then, that the stock is down 32% year-to-date (as of July 15). That's in spite of year-over-year top-line growth of 37% and a 29% increase in adjusted net income in the first quarter. Long-term owners can take solace in the fact that the stock price has surged 3,000% in the last decade, but more recent buyers might feel slighted.

The problem is valuation. Lending Tree's market cap is $2.9 billion. That's 79 years' worth of profits based on the last 12 months, although it's only 32 times Lending Tree's projected 2019 earnings. Management has said that full-year 2018 revenue and adjusted EBITDA will expand by as little as 25%. That's nothing to scoff at, but with much of that growth already priced into shares, a big pullback was inevitable.

A computer screen displaying stock bar charts and graphs.

Image source: Getty Images.

A more-connected world isn't always a slam dunk

As the reach of the internet continues to expand into new applications, many electronics parts suppliers have experienced transformational growth. MaxLinear -- a provider of connection-enabling devices for the smart home, telecom, and other industries -- has grown its sales nearly 50% since 2016, including a 25% increase in the first quarter. The stock has fallen 36% this year, though.

MaxLinear's acquisitions of rival Exar for $700 million ($472 million net of Exar's cash) and of Marvell Technology Group's home networking business for $21 million drove the sales increase. The idea of these deals was to increase MaxLinear's footprint in the world of connected things, picking up new sales, and to save on operating costs through merger synergies. So far, that hasn't panned out.

By the end of 2017, MaxLinear had swung to a loss, and first quarter 2018 earnings were only $0.03 per share. A big contributor to the deteriorating bottom line was that the company had to take out loans to fund its purchases. Interest expense was $3.9 million during the first quarter, eating up most of the company's $4.4 million operating profit. With sales expected to stay stagnant in the second quarter, the stock has remained under pressure.

An on-again, off-again relationship

Over the course of two years, OLED technology patent-holder Universal Display's sales and profits skyrocketed. Its stock followed suit, doubling twice through 2016 and 2017. This year has been a different story, with valuation being cut in half as Universal Display has become more dependent on Apple's (NASDAQ: AAPL) iPhone business.

OLED displays have been around for a while, most notably in ultra-high-definition and low-profile televisions. Apple's premium iPhone X that debuted in late 2017 was seen as the start of a new OLED era, one that would eventually replace older LED screen technology. Debate has swirled around how many iPhones will actually get an OLED screen in the 2018 lineup, though. And every conflicting opinion and research report has sent Universal Display's stock tanking or soaring.

As with all new tech, adoption comes in fits and starts. However, as the holder of OLED patents, Universal Display wins no matter who uses the tech or what the application is. Plus, despite the market's confusion on how to value Universal Display's stock, management was very clairvoyant at the end of 2017 about what to expect in 2018: a year of transition. Sales were expected to slow as display manufacturers gear up for more OLED screen construction before returning to growth during the back half of 2018. The slowdown did transpire in the first quarter, with a 22% year-over-year sales decline; the next event to await is the anticipated rebound.

As demonstrated by these three underperformers, business growth doesn't always equate to stock growth. For some, like MaxLinear, business expansion comes at too high a cost. For others, like Lending Tree and Universal Display, a pullback in shares is a chance to pick up a stock with the potential to resume strong growth once again.

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Nicholas Rossolillo and his clients own shares of Apple and Universal Display. The Motley Fool owns shares of and recommends Apple and Universal Display. The Motley Fool is long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.