When looking at the vast sea of state-owned enterprises, a small percentage is inevitably better than others. There are certain characteristics that make certain companies stand out, and these are the ones that I want to complete a portfolio of high quality stocks that will outperform over time.
With that in mind, here are my three favorite stocks right now.
1. Mexican Grill Chipotle
Mexican Grill Chipotle (NYSE: CMG), the fast-casual Tex-Mex restaurant stock, reported another excellent quarter on October 21. Comparable store sales (or compositions) jumped 15.1%, and this comes on top of an 8.3% increase over the prior year period. It was the fifth consecutive quarter of double-digit revenue growth, and the stock has more than quadrupled since reaching a pandemic low in March 2020.
What makes Chipotle so special is its scale. In an industry with a high failure rate, it has 2,892 locations serving burritos, bowls and tacos through a repeatable model, and that’s why the company is where it is today.
While most restaurants have struggled to survive for the past 18 months or so, Chipotle has thrived, in large part thanks to its strong brand and digital ecosystem. Over 23 million people are members of Rewards, giving the company an extremely valuable channel to connect with customers and drive higher levels of engagement. And digital sales accounted for 42.8% of the company’s total revenue, down from just 18.3% in the same quarter of 2019.
And of the 97 new restaurants opened in the past two quarters, 81 were built with a drive-thru, called Chipotlane. This format allows the company to serve its customers in the way that works best for them, especially during a pandemic.
The company still has a long growth path before him if the leadership can execute his vision. “We remain confident in our key growth strategies and believe that over the longer term they will allow us to have 6,000 restaurants in North America,” said CEO Brian Niccol during the second quarter earnings call . As a fast growing and popular restaurant operator thanks to his investments in technology, Chipotle is one of my favorite stocks.
With 62 billion dollars market capitalization as of this writing, Lululemon (NASDAQ: LULU) is a leading stock in the clothing industry. Shares have climbed over 700% in the past five years, a performance that has crushed the broader market as well as larger competitors like Nike and Adidas. In the most recent quarter, revenues and profits jumped 61% and 140%, respectively, compared to the period a year earlier. This good performance has led management to raise its forecasts for the entire year.
Lululemon is a fantastic company because of its powerful brand. According to Piper sandlerthe last Taking stock with adolescents survey, Lululemon was the fifth most popular name in apparel, although it did not have a specific business segment that targets teens. What started out as women’s yoga gear has now grown into a full-fledged lifestyle brand. And since the second quarter of fiscal 2021, men’s earnings have grown at a compound annual rate of 31% over the past two years, surpassing the 26% growth for women.
The strength of the brand is demonstrated by an exceptional gross margin of 58.1%. Lululemon sells its merchandise primarily through its website and 534 company-owned stores around the world, which helps the company better manage inventory and avoid costly markdowns. In the second quarter, 41.2% of total revenue came from the e-commerce channel.
Like many other businesses today, Lululemon faces supply chain issues. But by moving production to other Southeast Asian countries, prioritizing major vacation styles, and investing in additional air freight, the company should be able to weather the headwind.
“I would definitely say this is temporary in nature,” CFO Meghan Frank said on the latest earnings conference call, when asked by a Wall Street analyst about the need for increased capacity. No matter how serious the supply chain challenges are, Lululemon is poised to do the right thing.
3. O’Reilly Automobile
Although it operates in the boring auto aftermarket industry, O’Reilly Automotive (NASDAQ: ORLY) is flourishing. Comps in the most recent quarter rose 6.7% after increasing 16.9% in the same quarter of 2020.
Both sales and net income have been steadily growing over time, so it’s no surprise that the stock has risen over 700% over the past decade. And the company now has 5,740 stores in the United States and 22 in Mexico.
The recession-proof nature of O’Reilly’s business model is what is so attractive to investors. During the financial crisis, annual revenue soared 41.8% in 2008 and 35.5% in 2009, demonstrating the company’s attractiveness in all weather conditions. But even in tough economic times, O’Reilly still shines. When unemployment is low and the economy is growing, consumers tend to drive more, which increases the wear and tear on their vehicles. This supports the demand for the business.
A gross margin of 52.3% and an operating margin of 21.7% in the third quarter, coupled with low capital expenditures, make O’Reilly a cash cow. Management has historically returned excess cash to shareholders through share buybacks. Over the past 10 years, the number of outstanding shares has dropped by almost half. Free movement of capital for 2021 is expected to be between $ 2.0 billion and $ 2.3 billion, leaving plenty of ammunition for the company to continue repurchasing shares.
Due to O’Reilly’s stable business and an attractive valuation of just 22 times earnings over time, this completes my list of favorite stocks.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.