Investors often overcomplicate the process of finding good stock purchases. Market-beating returns don't require you to uncover a tiny, unproven business with obscure assets. You don't need to be among the first to gain exposure to the next big tech innovation, either.
Some of the best long-term investments can involve mature companies that are openly demonstrating their earnings power. Let's look at a few of these obviously strong buys.
1. McDonald's continues to strengthen its market dominance
I already own McDonald's (MCD -0.91%), but I wouldn't hesitate to add more of it to my portfolio right now. The fast-food giant is expanding quickly: Q3 comparable-store sales jumped 9%. That's nearly twice the growth rate that peer Chipotle managed. The two chains are increasingly facing off against each other as Chipotle moves into the drive-thru channel. Yet McDonald's continues to strengthen its market dominance with each passing year.
The chain's finances are mouthwatering, too. Profit margin is expanding toward a record 45% of sales, which is head-and-shoulders above peers in the fast-food industry. It helps that McDonald's gets most of its earnings from high-margin royalty, rent, and franchise fees.
2. Electronic Arts is posting next-level returns
It's time to get excited about video game stocks again following the industry's growth hangover in 2023. And starting with a leader like Electronic Arts (EA 0.46%) makes a lot of sense.
EA underperformed the market last year and trailed peer Take-Two Interactive by a wide margin. Wall Street is more excited about Take-Two's potential to boost sales by about 40% to $8 billion in the new fiscal year thanks to several huge game releases on the way. EA is likely to see more modest gains of around 5%.
Yet EA still has a clear path to roughly $8 billion in revenue this fiscal year, and without all of the uncertainty involved with launching several new franchises. EA is also profitable and cash-flow-positive, two valuable achievements that Take-Two can't claim today. Furthermore, the stock is reasonably priced at 5 times annual sales.
3. Ulta has raised its growth outlook
Investors are worried about Ulta Beauty's (ULTA -0.40%) short-term growth prospects, which explains why the stock is available at such an attractive price today. You can own shares of the cosmetics and fragrance products retailer for 2 times annual sales, down from the pandemic-high valuation of 3 times sales. Stock returns have been negative over the past year, while the S&P 500 soared by 22%.
Yes, Ulta's industry is going through challenges right now. Peers have been slashing prices to keep inventory moving, and that's pressuring sales and earnings trends. Yet Ulta is enjoying strong customer traffic, ample cash flow, and profitability that's well above its pre-pandemic rate. Executives hiked their 2023 growth outlook back in late November as well, and are now calling for comparable-store sales to rise by as much as 6%.
Cautious investors might want to watch Ulta Beauty's next earnings report for confirmation that the business is still on track to increase sales in 2024. Inventory management will be key to maintaining the company's roughly 15% operating profit margin as well.
If you don't mind some risk, though, consider adding this stellar business to your portfolio now. This no-brainer buy should deliver excellent returns for patient shareholders over the next several years as Ulta capitalizes on its strong market share in stores and in the online selling channel.
