Investing in growing companies is the ticket to building lasting wealth in the stock market. It’s even better when you can buy stocks of strong businesses at a discount, which can set up superior returns over the long term. Let’s look at three top consumer brands that you can buy right now at attractive valuations.
1. Starbucks
Starbucks (NASDAQ: SBUX) has a strong global presence, with nearly 39,000 stores open at the end of its recent quarter. The company’s consistent growth over the years has delivered outstanding returns to investors, but recent weakness in comparable-store sales sent the stock down 39% from its previous highs. This gives investors an opportunity to buy this global brand at a more reasonable price that could set it up for market-beating returns.
Starbucks reported a surprising 4% decline in comp sales last quarter. The company’s uncharacteristic sales miss reflects a soft consumer spending environment, as other retailers are also reporting weaker-than-expected sales. However, the company’s renewed focus on driving down costs and improving efficiency should lead to better earnings growth that can eventually send the stock back up.
This is an incredibly strong consumer brand that was posting double-digit top-line growth a year ago. Starbucks recently announced a new collaboration with Marriott International to link loyalty accounts across both brands, which could be an important sales driver over the long term.
Wall Street analysts expect earnings to climb at an annualized rate of 12% over the long term. Meanwhile, the lower share price means investors are paying less of a premium for that above-average earnings growth. Trading at a forward price-to-earnings (P/E) ratio of 21, which is lower than the average S&P 500 company, the stock is a screaming buy.
2. Lululemon Athletica
Shares of Lululemon Athletica (NASDAQ: LULU) are 41% off their previous peak after the company reported a weaker-than-expected earnings report earlier this year. However, the athletic wear industry continues to march higher, which positions Lululemon to grow into a globally dominant brand one day.
Lululemon has expanded from a single store in Vancouver to 711 stores worldwide. This large store base combined with the company’s e-commerce business generates $9.8 billion in annual revenue. The company has plenty of room to keep growing, considering the active wear market is projected to reach $451 billion by 2028, according to Statista.
The stock is down even after Lululemon posted a revenue increase of 10% year over year last quarter. On the surface, it looks quite strong compared to Nike, which posted a sales decline of 2% last quarter, but Lululemon is simply falling victim to the expectations game on Wall Street. While double-digit growth is solid in an unpredictable retail environment, it is well off the pace of what investors were used to seeing from Lululemon. The company’s revenue consistently grew at an annualized rate of nearly 20% over the last 10 years.
This uncertain year gives investors the chance to buy the stock at a reasonable valuation that could set the stage for excellent returns. The shares trade at a relatively low forward P/E of 21, while Wall Street analysts still expect Lululemon to increase earnings at an annualized rate of 11% over the long term.
While it’s possible the stock could hit new lows before it heads higher, investors can expect Lululemon shares to deliver returns consistent with its future growth trajectory, which remains substantial.
3. Walt Disney
Walt Disney (NYSE: DIS) is a timeless brand that has been entertaining families for a century. That should be a reason for investors to pounce at the opportunity to buy shares at a 51% discount to their previous peak.
CEO Bob Iger, who previously led the company for 15 years, returned to the helm in 2022 to improve Disney’s profitability. The entertainment giant has spent billions to launch and fund content production for the Disney+ streaming service, but this eroded Disney’s profit. Iger implemented a plan to improve the company’s financial situation, and so far, it’s working.
Disney reported an operating profit of $3.8 billion last quarter, up 17% year over year. The company is now targeting a 25% increase in adjusted earnings per share for fiscal 2024.
In terms of entertainment, which is the heart of the company, Disney has notched some notable wins lately. Pixar’s latest movie release, Inside Out 2, grossed more than $1 billion at the box office. Meanwhile, Disney’s parks business continues to ride the strong demand for travel, with revenue up 10% year over year last quarter.
The parks and experiences segment is one of Disney’s largest divisions and is taking the sting out of the weakness in the company’s media networks (e.g., ABC), which are continuing to see weak revenue trends. Wall Street analysts expect Disney’s earnings to grow 17% per year in the coming years. With the stock trading at a reasonable forward P/E of 21, investors could see market-beating returns over the next few years.
Should you invest $1,000 in Starbucks right now?
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John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lululemon Athletica, Nike, Starbucks, and Walt Disney. The Motley Fool recommends Marriott International and recommends the following options: long January 2025 $47.50 calls on Nike. The Motley Fool has a disclosure policy.
3 Top Stocks to Buy Hand Over Fist was originally published by The Motley Fool
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