Investing in growth stocks is one of the best ways to earn great returns, especially when the company in question has a clear path to keep growing.
Trex (TREX -0.94%) is a leading brand in residential decking products that has returned about 670% over the last five years, but management is pursuing a long-term goal to expand capacity, which could lead to substantially more growth.
Crocs (CROX) has emerged as a top footwear brand with a great marketing strategy. The stock is up more than 2,000% over the last five years, but it still trades at reasonable price-to-earnings ratio.
Here are the details you need to know before buying these stocks.
Trex: The leader in alternative-wood decking products
The Trex brand is known for superior quality, aesthetics, and performance, especially compared to pressure-treated wood products that are susceptible to damage from moisture. The company has experienced surging demand over the last few years as the low maintenance of wood alternatives continues to take market share from real wood residential products.
Even before the pandemic, Trex was in growth mode. Revenue nearly doubled between 2014 and 2019, and it has been a huge tailwind that the interest in home remodeling that has gained momentum since last year only continues as the economy reopens. The company recently reported accelerating revenue growth in the third quarter of 45%.
Another positive was the performance on the bottom line, where earnings per share surged 73% year over year, despite higher costs in raw materials and transportation due to the inflationary environment. For that performance, management credited cost reduction projects, continuous improvement to automation, energy efficiency, and raw material processing, as well as recent price increases.
Not surprisingly, shares surged to a new high after the third-quarter earnings report, but there could be further upside. In 2019, management initiated an investment to expand manufacturing capacity, which is a great sign that management sees current demand as sustainable over the long term. This investment will expand capacity by 70%, which should drive higher revenue once completed.
Trex has two big tailwinds going for it: the surge in residential spending and the growing demand for more affordable and lower-maintenance options compared to real wood. The stock is still a buy at these highs ahead of the capacity expansion, not to mention its potential in international markets.
Crocs: One of the most popular brands among teens
Crocs are certainly not for everyone, but the business is an investor's dream. Revenue has exploded this year, with 77% growth through the first three quarters of 2021. This builds on the momentum from 2020 when Crocs delivered a record year and was named Brand of the Year by Footwear News. The stock has tacked on a return of 180% year to date to go with the already stellar market-beating returns investors have enjoyed for several years, but there's more to come.
Crocs is long past the fad stage. It has graduated to iconic brand status. A lot of its appeal has to do with the variety of designs and the company's sophisticated marketing strategy. For example, Crocs has leveraged the popularity of celebrities such as Justin Bieber and Post Malone to market the shoes to a young audience. Recently, its brand ranked No. 6 on Piper Sandler's Fall 2021 Taking Stock with Teens survey.
From a business perspective, there is a lot to like. The shoes are very simple to manufacture, which is great for profitability. Crocs generated $418 million in free cash flow over the last year on $2.1 billion in revenue. That's a very high free cash flow margin of nearly 20%. In contrast, Nike's free cash flow margin is only 13%.
Management continues to capitalize on its increasing brand strength with new products and collaborations. It raised the low end of full-year guidance and now expects revenue to grow from 62% to 65% over 2020. Even after the sharp rise year to date, the stock trades at a forward price-to-earnings ratio of 23 times. At that valuation, on top of the terrific growth the company is experiencing, the stock could handily beat the market.