Are Growth Stocks Dead?

Shares of Chipotle Mexican Grill (NYSE: CMG  ) dropped over 20% Friday after the restaurant chain posted disappointing top-line growth in its second-quarter report. Investors got spooked that the burrito-rollers may not be growing as fast as they'd hoped, and with a P/E of over 50 before the report came out, the stock took a beating. But Chipotle isn't the only one feeling the pain.

Fellow travelers Panera Bread (Nasdaq: PNRA  ) , lululemon athletica (Nasdaq: LULU  ) , and Monster Beverage (Nasdaq: MNST  ) were all down more than 5% at one point. Let's take a look at what's going on here.

Badly burned burrito
Though Chipotle beat earnings estimates handily, the market needs to see strong sales growth in order to support continued EPS increases. Revenue grew by just 20.9% as opposed to estimates of 23.6%, and its same-store sales increase of 8% was also lower than expected.

Investors have become wary of growth traps after the collapse of Netflix and Green Mountain Coffee Roasters (Nasdaq: GMCR  ) the past year. Investors tend to run once the story starts to smell fishy. But Netflix and Green Mountain had unique problems. The video entertainment specialist's DVD-by-mail business model was disrupted, and it was forced to move into video streaming, exacerbating the situation with a number of customer relations errors along the way. Investors fled from Green Mountain because its K-cup patents are about to expire, meaning it will no longer have a monopoly on its most valuable product.

Nothing in particular seems to be ailing the other growth stocks above, though they're all well off recent highs.

lululemon shares seem to be stuck in a downward-facing dog recently. They've fallen about 30% since all-time highs at the beginning of May, and the yoga clothier faced a sell-off of its own after its guidance last quarter came in below the experts'. The company said it expected comps in the low double digits in Q2 after they had jumped 25% in the first quarter. The apparel seller is facing rising competition from the likes of Gap copycat Athleta, but with under 200 stores, lululemon still has plenty of room to expand, as well as international opportunities awaiting. With a P/E down to 41 after the pullback and EPS growth at 39% in its most recent quarter, this looks a good buy at current prices.

Monster Beverage looks like it's been hiding under the bed recently as shares have fallen more than 10% in just two days last week. Even after the drop, shares are still up 30% over the year, and some have called this a good time to take profits. Monster faces competition from all corners of the market, but the energy drink segment has been one of the fastest growers in the beverage industry. Net income rose 38% in its latest quarter, in line with its P/E ratio of 38. Observers may question how long the energy drink category will continue to grow at this pace, but with sales outside of the U.S. at only 19% of revenues, it looks like Monster has plenty of room to add sales overseas. Its distribution partnership with Coca-Cola will only help. Shares look appropriately priced right now.

As another fast-casual restaurant chain, Panera bears the most in common with Chipotle, and its stock should be most likely to move with the burrito chain. Shares of Panera are down about 12% since highs in March, riding the general market trend. Net income increased 28% at Panera restaurants in the first quarter, corresponding to its P/E of 29.8. About half of Panera restaurants are franchised, unlike Chipotle, which is entirely company-owned. With over 1,500 restaurants already open, and stores requiring a larger footprint than Chipotle, there is probably less potential for expansion for Panera than for the burrito chain, which just passed 1,300 stores this quarter. Panera, however, is priced less than Chipotle shares and with less than half the market value.

Whole Foods and Starbucks also joined in the bloodbath, losing 7% and 4%, respectively.

Chipotle management cited the slowdown in the economy one possible reason for the disappointing sales, which took a dive in May at the same time the stock market dipped. Missing estimates will hurt highfliers like the stocks above, but they shouldn't be punished for regular downturns in the business cycle. In Q2 of 2009, for example, Chipotle showed same-store sales growth of just 1.7%. lululemon's Q2 2009 comps actually dropped by 2%. Those two stocks, as well as Monster and Panera, have wildly outperformed the market since the recession.

Foolish takeaway
For a verdict on Chipotle, investors will have to wait and see if sales follow the lower trend over the rest of the year, and how much of that is to blame on the overall economy.

Investors should recognize that the rest of the above stocks could take a dive with the slowdown, as the market gets nervous about them maintaining their high trajectory. That's not to say that these are bad investments, just that they tend to ride the business cycles harder than most stocks. As we saw with the recession, I expect a recovery will boost the stocks again. For the long-term investor, these stories are still intact.

Fool co-founder David Gardner's newsletter Rule Breakers has been guiding investors to multi-bagger returns for years, and some of his picks are the stocks above like Chipotle and lululemon. Now David thinks he's found another rule breaker that could be the next big winner. Find out what this hot stock is and all the other details you need in our special free report: "Forget Facebook: Here's the Tech IPO You Should Be Buying." Get your free copy now by clicking right here.

Fool contributor Jeremy Bowman owns shares of Chipotle Mexican Grill. The Motley Fool owns shares of Green Mountain Coffee Roasters, Chipotle Mexican Grill, Netflix, Starbucks, Panera Bread, and lululemon athletica. Motley Fool newsletter services have recommended buying shares of Green Mountain Coffee Roasters, Chipotle Mexican Grill, Panera Bread, Netflix, lululemon athletica, Monster Beverage, and Starbucks. 

Motley Fool newsletter services have recommended creating a bear put spread position in Chipotle Mexican Grill. Motley Fool newsletter services have recommended creating a lurking gator position in Green Mountain Coffee Roasters. Motley Fool newsletter services have recommended writing covered calls on Starbucks. The Motley Fool has a disclosure policy.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (2) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 23, 2012, at 12:00 PM, aufergy wrote:

    I think it's interesting that nobody is talking about Taco Bell's impact on Chipotle's SSS numbers. Taco Bell is heavily advertising a product that is pretty much copying Chipotle at a much lower price point. Plus, Taco Bell's SSS were up big in Q2. I think it's pretty obvious that some customers that typically go to Chipotle tried the new Taco Bell product. I doubt that is the only reason why Chipotle's sales disappointed, but surely is part of it. I do think that is temporary as the newness of the TB product wears off.

  • Report this Comment On July 23, 2012, at 5:42 PM, TMFLifeIsGood wrote:

    The video entertainment specialist's DVD-by-mail business model was disrupted, and it was forced to move into video streaming - article

    Hi Jeremy - I take issue with the assertion in the above sentence. NFLX has been pushing the streaming model for years. They are the first mover and top dog in the nacent streaming market. How do you arrive at the conclusion that the DVD-by-mail model was disrupted?

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1952907, ~/Articles/ArticleHandler.aspx, 12/19/2014 5:12:40 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement