1 Growth Stock Down 26% to Buy Right Now

It’s been a tough last few weeks for Dutch Bros (BROS 2.88%) investors. Shares of the coffee shop chain are down 26% from their late-June peak, setting off what looked like a budding comeback effort.

Concerns about lingering economic weakness are the overall culprit. As spending money gets tight, the market fears that premium drinks are vulnerable. And it’s not an unreasonable concern.

Still, investors are missing something about Dutch Bros that makes this pullback a buying opportunity: Consumers aren’t giving up everything, including their favorite Dutch Bros drinks.

Dutch Bros is different

Dutch Bros is a drive-thrus coffee chain. At the end of June, there were 912 localities, with a goal of 4,000 at some point in the next few years.

Compete with Starbucks (SBUX 1.07%) being everything the mainstream is not. While the biggest name in the industry is known for its uniformity and formality, Dutch Bros is intentionally casual. and personal. It’s not uncommon for its stores to support a local neighborhood cause or for its baristas to have genuine conversations with customers.

And that makes the difference. While retail and other service-focused businesses in the 1990s and early 2000s were formal and polished, consumers now expect authenticity and personality. This is especially true in the wake of the pandemic, which has highlighted how much we all want at least some degree of real human connection. Dutch Bros delivers it.

That’s what his results suggest, anyway. Second-quarter sales rose 4.1% year over year, extending a well-established (if somewhat erratic) trend. For comparison, Starbucks’ same-store sales for the same quarter fell 2% in the United States and fell 3% globally.

However, if consumers face the kind of fiscal difficulties they are said to be experiencing right now, Dutch Bros could still face headwinds. Either way, that’s the fear that surfaced following the release of its second-quarter report, which included weak guidance on sales growth. The stock has struggled ever since.

But sellers are missing something in this business and in today’s economy.

More bark than bite

Consumers are thinking more cautiously now than they have in a long time. The Conference Board, a nonprofit that tracks economic data, says its measure of consumer confidence fell by the most in three years just last month, moving within sight of its real multi-year low hit earlier this year.

People are increasingly concerned about tax-driven inflation, which could eventually undermine the labor market. Domestic buyers are also up to their necks in high-interest debt. The Federal Reserve reports that the total credit card debt of US households hit a record $1.14 trillion in the second quarter.

In other words, it looks tough out there financially.

Largely left out of the equation is the fact that these underlying conditions are cyclical. Eventually, the economy will get out of this predicament, because that’s what the economy does. It just takes time. And the time to invest in cycle-sensitive stocks is when they are down for these temporary reasons.

That said, discretionary spending may not even be cut as much as now feared. The U.S. Bureau of Economic Analysis reports that personal spending improved 2.7 percent last month (excluding food and energy costs), in line with year-over-year increases in recent months. Wages are also keeping pace with this increase in spending, while inflation itself continues to be subdued. These figures also extend existing trends.

Then there’s the fact that while Dutch Bros’ current growth isn’t blazing, it’s certainly not bad in an environment where other discretionary companies are struggling. In addition to falling Starbucks same-store sales, Home Depot and Macy’s also reported lower same-store sales for the second quarter of the year.

Perhaps Dutch Bros’ premium drinks are the satisfying pleasure people are still willing to pay for.

Dutch Bros stock is a compelling buy no matter how you slice it

That’s the bullish case following the stock’s recent 26% worry-driven pullback, though, not that it matters much if you’re a true long-term investor. Dutch Bros would still be a compelling buy at 26% above its June peak. It’s an increasingly profitable company that successfully executes on an idea that resonates with modern consumers. If nothing else, the company’s recent results say so.

Data source: StockAnalysis.com. Chart by author.

This should lead to the bottom line: Despite being surrounded by many concerns, most analysts following the stock consider it a strong buy. Their consensus target of $40.64 is also 28% above Dutch Bros’ current stock price. Certainly not a bad tailwind for any new position.