Trying to time the stock market is a losing game. No one knows with any level of certainty what stock prices will do tomorrow, next week, next month, or even next year. Owning great businesses with a long-term time horizon is the key to building wealth.
This perspective doesn't mean that smart investors can't be prepared for when a market crash happens. Adding these two stocks to your watch list and being ready to buy shares when the opportunity strikes can prove to be a fantastic decision for your portfolio.
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Chipotle Mexican Grill
Since the unfortunate E. coli scare in late 2015, Chipotle Mexican Grill (CMG 0.40%) has been on an absolute tear. Over the past five years, quarterly revenue and profit have soared 100% and over 2,500%, respectively. The company also grew its total store count from 2,178 to 2,892 over the same period.
During the third quarter, Chipotle increased same-store sales (or comps) 15.1%, marking the third straight quarter of double-digit growth. The business was able to handle the pandemic extremely well thanks to its robust digital infrastructure. Customers can order on the website or via the mobile app for pick-up and delivery at nearby locations. Stores equipped with the popular drive-thru option, known as a Chipotlane, see stronger sales, margins, and returns. As of Sept. 30, Chipotle boasted 24.5 million rewards members on its platform. That's impressive for a program that's not even three years old yet.
According to the management team, Chipotle still has lots of growth left in the future. CEO Brian Niccol thinks the company will one day have 6,000 locations in North America with average unit volumes of $3 million. This means Chipotle's long-term revenue opportunity is $18 billion, a figure that doesn't even include potential international expansion.
The stock currently trades at a price-to-earnings (PE) ratio of 69, not cheap at all if we focus on this traditional valuation metric. Chipotle is a fine company, but the optimism is fully priced in today. As a result, the best course of action investors can take right now is to wait for a meaningful pullback in the stock before buying shares.
Image source: Getty Images.
Home Depot
With a stock price that has tripled over the past five years, Home Depot (HD -1.77%) has been an excellent investment. In that period, sales for this top-notch retailer jumped 59%, while net income increased 105%. Home Depot currently has 2,317 total stores in the U.S., Canada, and Mexico.
What makes this company special is its ability to shine no matter what the macroeconomic circumstances are. At the onset of the pandemic, consumers started spending more on renovation projects, boosting demand for Home Depot's DIY segment. But over the past three quarters, sales growth in the Pro business, which caters to contractors, electricians, and plumbers, outpaced the DIY business.
Nearly half of Home Depot's sales come from professional customers. Home Depot's prospects depend on this valuable cohort, who visit stores frequently and spend more. During the last quarter, the business produced a stellar return on invested capital of 43.9% and sales per square foot of $587.
Customers are taking on bigger jobs thanks to a combination of factors. They're more comfortable letting people inside their homes as the pandemic fades. And the strong housing market, still supported by low interest rates, encourages spending on home improvement projects.
Up 56% this year, Home Depot stock has crushed the S&P 500 in 2021. And it now sells at an elevated P/E multiple of more than 27, nearly the highest valuation the stock has reached in the past decade. Similar to Chipotle, I believe the market fully appreciates just how fantastic a business Home Depot is, leaving prospective investors no margin of safety at today's price.
Add Chipotle and Home Depot to your shopping lists and be ready to scoop up shares when the opportunity presents itself.
