These are once-in-a-decade buying opportunities.
Stocks can rise and fall for many reasons in the short term, but what makes a stock truly unstoppable is the company’s long-term growth prospects. Stocks will ultimately follow a company’s revenue and earnings growth over the long term, so if you can invest in growing companies at a discounted valuation, you’re potentially setting yourself up for big gains.
Wall Street is handing investors a great opportunity right now in two growing consumer brands. Shares of energy drink maker Celsius Holdings (CELH -4.67%) and athletic clothing brand Lululemon Athletica (LULU -5.24%) are currently trading 50% below their previous peak. Here’s why Mr. Market has it all wrong.
1. Celsius Holdings
Identifying emerging consumer brands before they grow into larger companies is one of the most rewarding types of investments you can ever make. Celsius Holdings has tremendous long-term potential, as noted by the stock’s phenomenal 2,700% return over the last five years.
Celsius initially focused on dietary supplements in the fitness market, but in recent years, its revenue growth has exploded as the business expanded into energy drinks. Following a distribution agreement with PepsiCo, the company’s revenue doubled in 2023 to $1.3 billion.
The deal with PepsiCo is a major advantage that should drive lots of growth over the long term. However, it’s also the reason why Celsius stock has tumbled this year. As the company’s largest distributor, PepsiCo and its recent inventory adjustments weighed on Celsius’ revenue growth in the first quarter and sent the stock down.
Still, Celsius reported robust revenue growth of 37% year over year in the quarter. This rate of growth points to a large opportunity ahead. Celsius has gained significant market share in the energy drink market. It is distinguishing its brand from competitors by making products with no artificial colors or sugar, which is clearly resonating with consumers.
There’s nothing that has changed Celsius’ growth opportunity — only the stock is offering investors a better value. This could set up outstanding returns for investors, as the company continues to build its brand in international markets.
The stock still trades at a relatively high forward price-to-earnings (P/E) ratio of 43, but analysts still expect the company’s earnings to more than double over the next few years as Celsius increases margins, which should support great returns from the current share price.
2. Lululemon Athletica
The leading apparel brands seem to have hit a wall this year. Weak sales caused Lululemon to report lower-than-expected revenue earlier this year that sent its stock down 50% off its previous high. However, Lululemon continues to report industry-leading growth, indicating a strong brand that deserves a higher valuation on Wall Street.
Lululemon still posted a year-over-year increase in revenue last quarter of 10%, which is significantly stronger than the low-single-digit growth at Nike and Adidas. In fact, Lululemon indicated that it missed some sales opportunities in the women’s assortment last quarter partly due to out-of-stock merchandise. Otherwise, its revenue growth might have been somewhat better.
The company has been bringing innovative new styles to the marketplace for years, which helped drive average revenue growth of 20% per year over the last 10 years. With just under $10 billion of annual revenue in a $300 billion athleticwear market, it should be able to deliver double-digit growth for a long time.
Analysts expect the company’s earnings to grow at an annualized rate of 11% although estimates were calling for 17% growth at the end of 2023. The current estimates are obviously influenced by the current sales environment.
Regardless which estimate proves correct, the modest forward P/E of 17 is a more than reasonable price for shares of a company that has a long history of above-average growth and a tremendous opportunity still ahead.
John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Celsius, Lululemon Athletica, and Nike. The Motley Fool recommends the following options: long January 2025 $47.50 calls on Nike. The Motley Fool has a disclosure policy.