2 actions that could create sustainable generational wealth

Return on invested capital (ROIC) may be my preferred metric when looking for stocks with the ability to create sustainable generational wealth. It measures a company’s profitability compared to debt and equity and usually highlights the degree to which its management is able to efficiently invest its capital in earning projects.

Stocks that generate high ROIC have easily outperformed their underdogs since 2003 and are well positioned to continue to do so in the future. Two stocks that fit this high-ROIC framework are the energy drink maker Celsius (CELCH -0.44%) and distributor of beauty products The ultimate beauty (ULTA 0.21%).

However, despite the high profitability that Celsius and Ulta Beauty bring to the table, their share prices are down 66% and 34%, respectively, from their 52-week highs. Here’s why this combination of circumstances makes now the perfect time to buy these two businesses.

Celsius’ growth story isn’t really over

Although its share price rose more than 7,000% between 2019 and early 2024, Celsius has fallen about 66% in recent months after a dramatic slowdown in sales growth rates. After that decline, it is now up about 2,700% since the start of 2019.

While Celsius has averaged sales growth of 94% annually over the past five years, its most recent quarter of 23% extended the company’s ongoing slowdown in growth.

CELH Revenue Data (Quarterly Yearly Growth) by YCharts.

Making matters worse, analysts now believe the company’s third-quarter sales could be down about 17 percent from last year’s numbers. So how exactly did this potential sudden change in declining sales come about?

1. In August 2022, peptic collaborated with Celsius and agreed to become its distributor.
2. Pepsi ordered a ton of Celsius products because the functional energy drink maker was already growing sales by more than 100% year-over-year at the time without Pepsi’s help.
3. Because Celsius earns revenue when it sells its drinks to Pepsi, it continued to produce wild growth in late 2022 and 2023.
4. Consumer spending began to contract slightly in 2024, slowing growth in the energy drink industry.
5. Pepsi realized that it had ordered too much inventory from Celsius and began to reduce its orders. That prompted Celsius management to announce that sales to its largest distributor would drop by $100 million to $120 million in the third quarter.
6. Analysts cut Celsius’ Q3 revenue estimates, and the company’s shares have fallen 66% from an all-time high set earlier this summer.

In short, most of this wild ride is a matter of timing. Pepsi (understandably) overprepared when it became Celsius’ primary distributor and (rightfully so) recalibrated its inventory further.

Overall, Celsius has increased its sales by 157% since the Pepsi deal. But because the growth was not smooth, the market reacted negatively.

However, Pepsi drama aside, it’s clear that Celsius’ growth story is far from over. First, scanner data (which shows what Celsius customers are actually spending in stores) is up 10% so far in Q3, according to market research firm Circana. Based on this growth in scanner data, amid a challenging consumer environment, management believes its market share is up a full percentage point year-over-year so far in Q3.

In addition, Celsius is expanding into Canada, the United Kingdom, Ireland, Australia, New Zealand and France. Driven by strong ROIC, which has grown to 27% today, Celsius could unlock numerous growth opportunities if it can replicate its highly profitable domestic growth internationally.

While the company still needs to prove that its high ROIC can be sustained over the long term, it already ranks above its peers in the beverage industry.

CELH data on return on capital invested by YCharts.

With international sales making up just 5% of the company’s revenue today — and its sales to Pepsi on track to normalize over the long term — Celsius looks well-positioned to create sustainable generational wealth.

Ulta Beauty: Poised to Exceed Low Expectations

Since its initial public offering in 2007, shares of specialty beauty retailer Ulta Beauty have generated total returns of 1,200%, nearly triple the returns S&P 500.

Still, Ulta shares are down about 34% from their 52-week highs as it struggled to run through the formidable comps it delivered amid the post-lockdown boom.

ULTA revenue data (quarterly annualized growth) by YCharts.

In the last reported quarter, Ulta’s same-store sales fell 1%, compared to an 8% increase in the year-ago period. The main culprit behind the slowdown has been increased competition in the beauty industry.

“More than 80% of our stores have been affected by one or more competitive openings in recent years,” Chief Executive Officer David Kimball explained on the fiscal second quarter earnings call, “with more than half affected by multiple competitive openings”. As alarming as this sounds, however, I am optimistic that these headwinds should prove to be temporary.

First, 95% of Ulta’s sales come from its 44 million Ultamate Rewards members, which shows how massive and loyal the company’s customer base already is.

Second, according to a survey conducted by Piper Sandler, Ulta remains the second most popular beauty destination among Gen Z shoppers with 31% of the vote; only LVMH-owned by Sephora ranks higher at 37%. To put these numbers into some perspective, the two beauty brands combine to hold a similar percentage of mindshare among Gen Z as TikTok and Instagram in the social media industry.

Finally, Ulta has averaged a 29% ROIC since going public and has also maintained positive free cash flow (FCF) every year. Generating nearly $1 billion in FCF last year alone, the company has an extra $400 million in cash compared to no long-term debt. Armed with that money, Ulta has reduced its outstanding shares by 27% over the past decade, helping to increase FCF per share more than eightfold during that time.

With the stock trading at a price-to-FCF ratio of 18 today, a reverse discount cash flow model will show that Ulta only needs to grow its FCF by 5% annually to meet its valuation. All in all, Ulta looks like a premium deal at a fair price—even Berkshire Hathaway and Warren Buffett seem to like it.