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Are Growth Stocks Dead?

Jeremy Bowman
July 23, 2012

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 wil