Why You Should Buy These Market Leaders on Weakness

With most momentum growth stocks experiencing weakness recently, savvy investors need to consider accumulating the strongest names on the market today.

Apr 5, 2014 at 1:30PM

With many of the so-called momentum growth stocks declining in recent weeks amid broad market volatility, it is time for investors to consider buying into the top performers. Two of the top-performing companies lately have been Chipotle Mexican Grill (NYSE:CMG) and Michael Kors (NYSE:KORS). With shares up 74% and 64%, respectively, in the last year alone, the recent pullbacks in these names present an opportunity for long-term growth investors.

The main driver of outperformance for both Chipotle and Michael Kors is the strong growth story behind each name. Both companies have a dedicated consumer base and the ability to charge a premium for products/services. With this, management teams at the companies are now looking to expand into new product lines and geographic markets.

Images

Source: Chipotle. 

Chipotle
Chipotle's business model is deceptively simple: Offer a high-quality food product to consumers in a quick and hassle-free manner. By doing this, the company has revolutionized the fast-casual dining segment over the years. Through clever marketing techniques and selective menu additions, management at Chipotle has been able to achieve consistent same-store sales growth. The expansion of new restaurants continues to be strong as well, as 56 new stores were opened in the most recent quarter alone. 

However, the largest drivers of future growth for Chipotle are the two new restaurant brands that management is currently testing. ShopHouse is the company's fast-casual take on Southeast Asian cuisine, and Pizzeria Locale is the company's fast-casual take on the pizza segment.

The key here is that both new brands are being built from the ground up to share similarities with Chipotle's Mexican-themed restaurant. With an emphasis on healthy, high-quality ingredients, consumer choice, and fast service, there is no reason that ShopHouse and Pizzeria Locale can't be as successful as the company's original restaurant brand. The potential is massive considering there are only six ShopHouse locations and two Pizzeria Locale locations compared to 1,595 Chipotle Mexican Grill restaurants. 

Images

Source: Michael Kors.

Michael Kors
The strength of Michael Kors is derived simply from the company's incredible brand strength among consumers. To best illustrate this strength, we turn to social media. On Facebook, Michael Kors has approximately 13.3 million fans, compared to the company's close competitor, Coach, which has only 5.1 million fans.

The brand popularity of Michael Kors means that the company is stealing market share away from older retailers like Coach. In 2011-2012, Coach's share of the U.S. handbag market fell to 17.5% from 19%, while Michael Kors' grew to 7% from 4.5%. 

To capitalize on this brand strength, management at Michael Kors is expanding internationally. Chairman and Chief Executive Officer John Idol explained in the company's most recent earnings release:

In fiscal 2014, we are on pace to open 36 new stores in Europe. Over the long-term, we believe the market can support 200 Michael Kors retail locations. We see ongoing growth momentum in the wholesale segment and look forward to further expanding our presence in the channel over the next several years. 

Additionally, management highlighted markets like Japan and the Far East. Michael Kors is opening a flagship store in China, which should increase brand awareness as well as long-term demand. While the company has 94 stores in the area currently, management stated that the market could support over double that in the future. 

Bottom line
A strong and viable growth story is essential for all aggressive growth companies. Chipotle and Michael Kors currently represent two of the strongest stories in the market, and their futures appear even brighter.

With shares of both companies off significantly due to the widespread drop in most momentum stocks, long-term investors might do well to consider buying these popular names on weakness.

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Philip Saglimbeni owns shares of Chipotle Mexican Grill. The Motley Fool recommends and owns shares of Chipotle Mexican Grill, Coach, and Michael Kors Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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