Investors rarely get the opportunity to buy attractive growth stocks at a discount. This happens, in part, because Wall Street traders push shares higher for these businesses on the expectation that strong sales gains will power impressive annual earnings. Fears of a looming recession can for a time push these stocks lower, with the rebound likely occurring around the time it becomes obvious that a new cyclical upturn has started.
But long-term investors don’t have to wait for that clear sign of a new market surge before investing in great businesses. They can buy into these bounce-back stocks now and gain the full benefit when they do.
With that goal in mind, let’s look at why Ulta Beauty (ULTA) and Crocs (CROX) stocks could be ready to rebound after having trailed the market through the first half of 2023.
Crocs has momentum
There was very little about Crocs’ last earnings report for investors to find fault with. The molded footwear giant reported a 36% year-over-year sales spike in Q1, including a 22% increase in its core brand and an over 100% year-over-year jump in the recently acquired HeyDude franchise. Management raised its 2023 outlook following the late-April announcement and now sees annual revenue approaching $4 billion this year, up roughly 13%.
Crocs is also generating healthy profits today. Operating profit margin is near 30% of sales, compared to Nike’s 12% rate. Nike and its peers have been complaining recently about elevated inventory levels and increased price markdowns. But Crocs’ sales and margin trends imply that it is avoiding these pitfalls right now.
Cautious investors might avoid this stock due to its potential exposure to a recession. Elevated debt levels are another knock against the business right now. But its strong momentum implies that Crocs will be setting more sales and earnings records in the years to come, likely powering impressive shareholder returns.
Ulta Beauty has traffic
The dip in Ulta Beauty’s stock price this year makes some sense, given the company’s recent growth slowdown. Management said in late May that makeup industry sales trends have weakened slightly, and that the subsequent price cuts by competitors have pressured margins. Operating income slipped to 17% of sales through late April, compared to 19% of sales a year ago.
Look closer, and you’ll see no reason to abandon this growth thesis, though. Ulta Beauty posted a blazing 11% increase in customer traffic last quarter, for example, and the e-commerce business continues to attract more members to the loyalty program. These wins imply that Ulta can continue winning market share even during cyclical downturns.
Ulta Beauty is still much more profitable than it was before the pandemic struck as well. Management has been cautious about spending on new store growth, too, choosing to focus on more efficient moves like its recent partnership with Target.
Investors can take advantage of the recent drop in enthusiasm for the stock by picking up Ulta shares for about 2.2 times annual sales, down from a recent high above 3. There’s no telling when that valuation will start rising again. But Ulta is doing all the right things to pave the way for future growth, and those wins should help shareholders achieve attractive returns over the next several years.
— Demitri Kalogeropoulos
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Source: The Motley Fool