3 Stocks That Can Crush the S&P 500 in the Next Five Years

The S&P 500 the index has hit new highs this year, but not all companies in all industries have seen their stocks hit new highs. The retail sector has underperformed the broader market over the past three years, but that means there are compelling retail growth stocks selling at very reasonable valuations relative to their future potential.

Below are three companies operating in growth markets such as beauty and athletic apparel. The historical average annual return of the S&P 500 is about 10%, but these popular brands are growing their earnings at much higher rates, and their stocks are trading at fair valuations that should allow an investor buying stocks today to easily outperform the market wider.

1. Elf Beauty

Investors who identify brands before they become household names can make fortunes. Elf Beauty (ELF 5.44%) is one of the fastest growing consumer brands right now. Shares are up 424% over the past three years as the company’s combination of value, product innovation and smart marketing continues to fuel robust revenue growth.

Revenue grew 50% year-over-year last quarter. It is gaining significant market share in the cosmetics and skin care categories. Elf Cosmetics is now the second leading brand in the US after doubling its market share in the past three years.

Furthermore, elf capitalizes on the growing demand for skin care. It acquired Naturium last year, a popular skincare brand that launched in Los Angeles in 2019. It’s fueling Elf’s momentum, with the skincare company’s sales growing 32 times faster than competitors in the most-watched sales channels. recent quarter.

Elf Beauty also resonates with customers outside the US. It is now the brand no. 4 in the UK, up from No. 8 a year ago. It is also increasing brand awareness in Canada, where it is now #4 in the market, up from #6.

The brand’s success is based on offering competitively priced products that many customers consider superior in quality to leading competitors. This brand is disrupting the $100 billion beauty industry and could still provide shareholders with huge wealth from here on out.

The stock trades at a forward price-to-earnings (P/E) ratio of 44, which is typical for a fast-growing consumer goods brand. With massive potential for international expansion, not to mention margin expansion that could drive high earnings growth in the coming years, the stock could easily double in value over the next five years to outperform the S&P 500.

2. The Dutch Brothers

Dutch Bros (BROS 3.28%) is a fast-growing beverage chain that offers everything from coffee to sparkling juices in addition to smoothies and energy drinks. It started in 1992 and since the company’s initial public offering (IPO) in 2021, it has rapidly expanded into the U.S.

Dutch Bros has nearly doubled its store base over the past three years to 912. With the exception of a few weak quarters in recent years, the company’s total revenue has grown 30% or more every quarter through 2021. In the second quarter of this year , reported the same 30% increase in revenue, with same-store sales up 4% year-over-year.

The reason the stock hasn’t taken off can be attributed to a high valuation at the time of the IPO, along with recent low growth in existing stores. Same-store sales have mostly been in the low- to mid-single digits over the past 18 months. Moreover, the company’s weak net profit, which is just above the break-even point, leaves some investors looking for better margins.

An important metric that is overlooked is the company’s store contribution margin (or what remains after subtracting variable costs from sales). This measure increased by as much as 30.8% in the last quarter, which is on par with world-class restaurants such as Chipotle Mexican Grill. This indicates that as Dutch Bros grows the business and increases revenue, it will be a very profitable business.

The stock’s low price-to-sales (P/S) ratio of 2.4 is fair for a company that’s operating just above break-even but growing revenue faster than industry leaders such as Starbucks. As Dutch Bros continues to expand toward its long-term goal of 4,000 stores, the stock should continue to trade around the same P/S multiple unless it earns a higher valuation.

All that being said, the stock price should appreciate as the company’s earnings grow. With massive potential for the business, the stock should easily outperform the broader market’s return over the next five years and beyond.

3. Lululemon Athletica

Lululemon Athletica (LULU 1.93%) has been a fast-growing brand in the athletic apparel industry for the past 20+ years. It’s in a sweet spot for investors – it’s already established itself as a major brand in the industry, but it’s still small enough to offer market returns, especially at these low share prices.

Stocks have tumbled this year because of the slowdown in growth that many retail companies are reporting right now. Despite Lululemon’s relatively solid 10% year-over-year revenue growth, the stock is down 50% year-to-date and trades at its cheapest P/E in years.

Most telling of Lululemon’s potential is the stellar 35% year-over-year growth in international revenue last quarter. Last year, international sales made up just 21 percent of the business, but management sees that growing to 50 percent over the long term.

Moreover, Lululemon continues to grow its men’s business, which is a big deal considering the brand has historically been more identified as a women’s brand. Women’s products make up two-thirds of Lululemon’s business, but sales in the men’s category are up 15 percent from last year, showing the brand’s potential.

Lululemon is also benefiting from industry headwinds such as athleisure that have been in place for years. The sportswear industry is expected to reach $293 billion by 2030, according to Statista. The industry has been growing for decades, and Lululemon will almost certainly continue to grow with it.

The stock is a steal at the current valuation. Lululemon can continue to grow earnings at double-digit rates over the next decade from double-digit revenue growth and margin expansion. Over the past 10 years, it has averaged 20% annual earnings growth. There is a good chance that investors will double their money over the next five years from a combination of earnings growth and an increase in the stock’s P/E multiple.