2 Expensive Stocks to Buy If Market Selloff Continues

The market has had a wild ride this summer. take Nasdaq-100 Index. In early July, it hit an all-time high, then fell more than 10% in less than a month. Now, it has started to rise again, recovering most of those losses in the first half of August. Volatility is normal in the stock market, but it’s been a wild ride for growth investors so far in 2024. Even though financial experts seem confident when predicting the next direction for stocks, it’s a change when looking at just a few quarters (or even a few years).

Stocks may decline for the rest of 2024. If they do, you should be prepared anticipated which companies you want to buy for. Here are two expensive stocks to add to your portfolio if the market sell-off resumes.

Shopify: Ecommerce promotion and pricing power

Our first look is Shopify (NYSE: STORE)one of Canada’s largest technology companies. It operates a software and payment platform that helps merchants seamlessly sell products online on their own websites, as opposed to using large aggregators such as Amazon. The stock has posted a total return of 2,800% since going public in 2015, crushing broad market indices such as S&P 500.

Much of this has to do with Shopify’s impressive financial success. As the leading e-commerce software platform, it now has hundreds of thousands of thriving businesses thanks to its software tools. Customers generally pay a monthly subscription fee to access Shopify’s software tools, ranging from $29 per month for small businesses to thousands of dollars per month for larger enterprises. Subscription revenue has grown at an astounding rate. In the second quarter of 2015, Shopify’s subscription revenue was $25.5 million.

Last quarter — Q2 of 2024 — subscription revenue reached $563 million. It was still growing 27% year-over-year due to a growing customer base and price increases that Shopify implemented with little impact on churn. Add in the fast-growing payment processing service, and Shopify’s revenue has grown 7,290% since going public. In the past 12 months, it generated $7.8 billion in revenue and $1.3 billion in free cash flow.

I have confidence that Shopify will grow its sales and free cash flow for years to come. But today, the stock looks expensive. At a market cap of $96 billion, it trades at a forward cash flow (P/FCF) of 74 based on trailing cash flow generation. That’s significantly higher than the market average, which isn’t a risk I’d be willing to take buying Shopify stock today. This is a high-quality deal, but you should buy it at a cheaper price. Keep Shopify stock on your watch list in case the stock market sell-off resumes.

The story continues

Chipotle: How much is a burrito chain worth?

Our following company is one that many readers will know about and have interacted with: Chipotle (NYSE: CMG). Like Shopify, the Mexican burrito and bowl chain has posted some impressive growth numbers this century, leading to some monster gains in the stock. Since going public in 2006, revenue has grown 1,360% as Chipotle opens more and more restaurants in North America.

The company has seen impressive growth numbers and appears to be taking market share from other restaurant chains. For example, in 2024, many restaurants saw a decline in comparable sales growth, which measures revenue growth at existing locations. Inflation has fallen and consumer spending in the United States is falling. Despite that, Chipotle posted comparable sales growth of 11.1% last quarter.

The strong growth pushed Chipotle shares to a higher earnings rate. It currently has a price-to-earnings (P/E) ratio of 51, which is roughly double the S&P 500 average. Unlike Shopify, Chipotle is not a fast grower. It can generate sustainable revenue growth, but you can only open so many restaurants in a calendar year. This puts a cap on its ability to grow.

For that reason — and the fact that the company is much bigger than it was even five or 10 years ago — Chipotle stock looks expensive at today’s prices. Investors should not forget that the CEO, Brian Niccol, and the CFO have announced their departure from the business. The new management creates uncertainty: will they spoil the growth formula of the last two decades? Investors don’t know the answer today, which creates a risk for anyone buying at current prices.

Keep Chipotle stock on your watch list and wait for a potential stock market selloff. The price you pay for a stock matters, even for a high-quality one like Chipotle.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Brett Schafer has positions in Amazon. The Motley Fool has positions in and recommends Amazon, Chipotle Mexican Grill and Shopify. The Motley Fool recommends the following options: short September 2024 $52 put on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.

2 Expensive Stocks to Buy If Market Selloff Continues was originally published by The Motley Fool