The 3 favorite stocks to buy right now

With S&P 500 index is up 17% in 2024 and now trades at a historic price-to-earnings (P/E) ratio of 27, it may seem reasonable to think that there aren’t many attractively priced stocks left in the market.

However, the Magnificent Seven make up nearly a third of the index’s allocation, and these stocks have an average P/E of 39. This over-allocation makes the S&P 493’s “true” valuation somewhere closer to 21 or 22 times. earnings — which is slightly below historical averages.

In short, it remains as good a time as ever to buy and hold for the long term. Here are three favorite consumer goods stocks for patient investors to consider.

Image source: Dutch Bros.

1. The Dutch Brothers

New chain of coffee and craft drinks Dutch Bros (BROS 1.73%) may be my favorite growth stock in the market today. With more than 900 stores in the western and southwestern United States, Dutch Bros has doubled its store count and tripled its sales since 2020.

And the future looks even brighter.

Despite that growth in 2020, about three-quarters of its 918 stores are in just five states: Texas, Arizona, California, Oregon and Washington. Additionally, Dutch Bros only has a presence in 18 US states, which is why management believes it can reach a store count of over 4,000 in the long term.

As tempting as these growth prospects are, Dutch Bros’ near-positive free cash flow (FCF) is what makes the company so interesting to me right now.

BROS Cash from Operations data (quarterly) by YCharts

FCF equals cash from operations (CFO) minus capital expenditures (expenses for new stores and maintenance for existing ones), meaning Dutch Bros is very close to being able to finance its expansion out of pocket. It has seen positive same-store sales growth for six consecutive quarters, and I’m optimistic that the company will soon reach positive FCF, leaving it less reliant on shareholder dilution to raise funds for new stores.

It trades at 13 times CFO — compared to its mega-peer Starbucks‘ note 16 — Dutch Bros’ expansion potential and skyrocketing 30% sales growth in its last quarter point to attractive prices.

2. Chewed

It’s no secret that chew (CHWY 0.72%) — the largest e-commerce pet retailer in the US — is loved by its customers, earning the #1 ranking Forrester Researchhis customer experience index. However, what is not as well known is that Chewy has finally reached profitability.

Not only does the specialty pet retailer generate net income, but it also targets five larger revenue streams: Chewy Vet Care, Chewy Health, pet insurance, private label products and sponsored advertising. Combined with the efficiencies Chewy sees from 78% of its sales being recurring autoship purchases, these high-margin concepts should continue to increase the company’s profitability.

CHWY Operating Margin (TTM) data by YCharts

Chewy Vet Care looks especially promising after the company opened six locations in the last two quarters. According to management, early indications show that clinics are a promising acquisition funnel for new customers and have huge cross-selling potential. Compared to the pessimistic private equity firms that have come to dominate the veterinary industry in recent years, Chewy Vet Care is welcomed by veterinarians and pet owners alike.

Trading at 21 times forward earnings, Chewy’s budding profitability, devoted customer base, and vet growth potential seem reasonably priced to potential investors.

3. Vail Resorts

Comprised of 37 North American ski resorts — including three of the top five and five of the top 10 most visited annually — Vail Resorts (MTN -2.61%) is the biggest player in the ski resort industry on its home continent. The main reason Vail is one of my favorite long-term stocks is the simple fact that no new ski resorts have been built at scale in over 40 years — giving the company a unique geographic advantage over any potential competitor.

However, following a post-lockdown boom, Vail’s share price is down 50% from 2021 highs due to a weak consumer spending environment, lower snow totals at many North American resorts and of concerns about its debt level.

Vail currently houses a formidable net debt balance of $2.1 billion against $825 million in earnings before interest, taxes, debt and depreciation (EBITDA). However, after extending the maturity date of a $600 million note from 2026 to 2032 and also moving the maturity date of its $969 million term loan and 500 revolver million dollars from 2026 to 2029, Vail has earned some financial margin.

Despite these extensions, the company’s debt load means Vail may be more focused on trying to maintain its precious 4.7% dividend yield than increasing it, which is usually a bad sign for investors.

However, with Vail trading at just 11 times EBITDA — which seems like a once-in-a-decade valuation — I’m happy to take the risk of a potential dividend cut.

MTN EV to EBITDA data of YCharts

After briefly suspending its dividend during the pandemic as a precaution, management has returned the company’s dividend yield to near all-time highs. However, with 83% of its FCF being used today to fund these payments, Vail’s focus will likely turn to maintaining that dividend so it can focus on managing its debt balance.

However, Vail has been FCF positive every year since 2010, so the company’s cash generation has proven as solid as the mountains its resorts are built on. Now generating 65% of sales from a season subscription model (up from 26% in 2008), Vail should produce less cyclical cash flow going forward, adding the additional FCF stability needed to fund its the voluminous balance of dividends and debts.

While it’s anyone’s guess when the broad consumer spending environment will improve, I’m happy to collect Vail’s well-funded 4.7% dividend yield while I wait for a recovery and hope to see the company’s deleveraging in the meantime.