Wall Street Loves These 3 Growth Stocks — Should You?

Table of Contents A bet on higher-quality fast foodPowering e-commerce for small businessesOnline-only fashion One

One of the core tenets of investing that people need to understand before they even begin to put money into stocks is that the market is not always rational. You can generally rely on certain principles to point you in the right direction, but there will be risk in any strategy since the share prices might move in ways that just don’t seem to make sense.

For example, meme stocks have become a feature of the market in 2021, which means that groups of individual small investors can foment excitement about a stock that doesn’t deserve your confidence and jack up its price well beyond anything justified by the underlying business. And sometimes Wall Street reacts strongly to news that doesn’t impact the business as much as the stock change would imply.

Then again, sometimes Wall Street can pretty well hit the nail on the head. This year, Wall Street has been loving Chipotle Mexican Grill (NYSE:CMG), Shopify (NYSE:SHOP), and Revolve Group (NYSE:RVLV). Should you give them some love — and some space in your portfolio as well?

Image source: Chipotle Mexican Grill.

A bet on higher-quality fast food

Chipotle Mexican Grill has achieved success through its model of offering high-quality, fast-casual food with a focus on sustainability. The Mexican-themed chain operates nearly 2,900 restaurants with a goal of opening a total of 200 in 2021 and plans to accelerate that pace next year. Chipotle sees a total market opportunity of 6,000 restaurants, more than double the current count. That gives it plenty of opportunity for growth.

The company posted fantastic third-quarter results with a 22% sales increase, fueled by a 15% increase in comparable-store sales. Customers are clearly enjoying the food. Part of its strategy has been to invest in digital ordering capabilities and drive-thrus. Chipotle opened 41 new restaurants in Q3 — and 36 have a drive-thru (though there are still only 284 total across the chain).

It’s also dealing well with supply-chain issues, raising some menu prices to account for higher costs. This resulted in an improved gross margin in Q3 despite the issues.

This stock has gained more than 350% over the past five years. It’s up 32% year to date as of this writing, outpacing the 25% gain of the broad S&P 500 market index, and it’s trading at 74 times trailing 12-month earnings. 

Is Chipotle Mexican Grill a great company? Yes. Does it warrant that high a valuation, especially in 2021? I’m not so sure. It’s definitely not immune to supply-chain issues even while it can grow fast as it opens new stores. But Wall Street loves it, so the stock might continue to post great gains anyway.

Powering e-commerce for small businesses

E-commerce has been gaining in importance for a long time, and while its growth rate has exploded since the pandemic began, there’s still a lot more growth to come. 

Shopify is among the companies at the center of the e-commerce revolution, powering small and medium-sized businesses with packages ranging from $29 per month to more than $2,000. It supplies all the services a business needs to get its products online, from website design and management to payments and workflow solutions.

The tech juggernaut sees a total addressable market of $153 billion, of which it now has less than 2%. It has the No. 2 spot in U.S. e-commerce, coming in behind Amazon and ahead of Walmart. And lest anyone think it was solely a pandemic play, its revenue growth continued to impress in the third quarter with sales increasing 46% over the year-ago period.

Shopify stock has been an amazing performer over the past five years, gaining nearly 4,000%. It’s up 48% this year as of this writing, and shares trade at 62 times trailing 12-month earnings. Yet, that could still be a reasonable valuation for a tech stock with tons of future potential.

Two people in a shop, one using a computer, and the other opening a garment box.

Image source: Getty Images.

Online-only fashion

Shopping for clothes online is nothing new, but Revolve Group has developed a model that meshes with younger consumers’ shopping habits. That means it’s totally online — and it uses artificial intelligence and big data to manage demand, inventory, delivery, and pricing. It also has its finger on the pulse of Gen-Z fashion.

The operation is growing fast and is tightly managed; Revolve launches an average of 900 new styles weekly, and 77% of its inventory is sold at full price.

In the third quarter sales accelerated, increasing 62% year over year, while EPS came in at $0.22, topping analysts’ consensus expectation of $0.14. Active customers increased by 124,000 to 1.7 million. Sales and marketing expenses increased as a percentage of sales as management doubled down on its strategy. That’s because the company sees itself as harnessing a huge opportunity. It recently hired celebrity Kendall Jenner to head its Forward brand with the goal of carving out a wider niche in its market.

Revolve stock has gained a whopping 174% year to date and trades at 71 times trailing 12-month earnings. This company has a strong future ahead, and so Wall Street seems right about Revolve Group.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Leave a Reply

Your email address will not be published. Required fields are marked *