1 Phenomenal Stock Up 166% in 5 Years: Is It Too Late to Buy?

Investors may be inclined to look at past winners to find potentially profitable stock options to own in the future. Winners will keep winning, he thinks.

Ferrari (RACE 1.35%)one of the world’s leading supercar manufacturers, has certainly supercharged shareholder returns. In the past five years, this phenomenon car stock up 166% (as of Aug. 9), beating the broadest S&P 500 by a mile.

But is it too late to add Ferrari to your portfolio?

Ferrari is a special business

There is really no argument about Ferrari being a high-quality enterprise. While there are many supporting factors, it all starts with strong fundamental performance.

Over the past few years, Ferrari has put up some stellar numbers. Between 2018 and 2023, revenue grew at a CAGR of 11.8%. The most recent quarter (the second quarter of 2024 ended June 30) saw year-over-year sales growth of 16.2%.

This peak growth is impressive. But what stands out are the strong bottom-line gains that have accompanied it. Ferrari boasts a fantastic operating margin of 29.9%. Combined with ongoing share buybacks, adjusted-diluted earnings per share (EPS) in Q2 was 139% higher than the same period in 2019.

In addition to its financial performance, there are other compelling features that make Ferrari a truly special deal. The brand is the company’s most critical asset, supporting its wide economic moat. Backed by Ferrari’s rich racing heritage and unmatched product performance and design, it has been promoted over several decades. I think it would be impossible for anyone to try to replicate the power of this brand.

Make no mistake: Ferrari is a luxury brand. Management intentionally produces a limited amount of vehicles year after year to keep demand robust. There is no doubt that the business could, if it wanted to, produce more cars and at the same time achieve more sales and profits. But this is simply not the right strategy as it would damage the brand image.

Consequently, Ferrari has incredible pricing power. Some of its most exclusive models sell for seven-figure sums, with strong demand from buyers. Warren Buffett, considered by many to be the greatest investor ever, believes that pricing power is one of the most important factors that identify a good company. Ferrari is in an elite category in this regard.

This is also a business that can help its shareholders sleep well at night. Ferrari faces minimal threats of disruption. Compared to almost every company out there, it’s better protected from macro headwinds like inflationary pressures and recessions. The Ferrari just keeps on humming, no matter what.

Where is the opportunity?

There is so much to like about this company. Anyone who takes the time to learn and understand Ferrari would be impressed.

But that doesn’t mean the stock is an automatic buy. The market is fully aware of Ferrari’s best attributes. And because of this familiarity, stocks trade at a price-earnings ratio (P/E) ratio of 51. That valuation is too rich for my blood, no matter how wonderful the business is.

Wall Street consensus analyst estimates say EPS will grow at an annual rate of just 12% between 2023 and 2026. There’s no way that projection justifies paying such a steep valuation. Investors who decide to buy the stock today are betting that the valuation won’t fall, which is hard to believe given that the S&P trades at a price-to-earnings (P/E) multiple of less than half that of Ferrari.

I think the best course of action is to simply add Ferrari to the watch list. And then patiently wait for a much better entry point. To me, that means the P/E ratio should probably fall somewhere around 35.