Investing in the stock market is the best way to build lasting wealth. And for long-term investors, or those with a time horizon greater than five years, focusing on owning high-quality businesses is a surefire way to help you reach your financial goals. Companies that have successful operating histories, some kind of competitive advantage, and a bright outlook deserve your savings.
Along the same vein, if you've got $1,500 ready to invest, look no further than Five Below (FIVE 1.39%), Lululemon (LULU -1.31%), and O'Reilly Automotive (ORLY -3.82%).
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1. Five Below
With its 1,173 stores, Five Below is a top discount shopping destination, selling merchandise primarily below $5. The company's product offerings range from toys and games to apparel and tech gadgets -- all in an attractive, vibrant layout for customers to encourage repeat visits. In fact, the average customer visits a store 10 times a year.
Despite ongoing supply-chain challenges as well as soaring inflation, Five Below had a strong holiday shopping period thanks to a focus on securing seasonal and trendy products well ahead of the busy time. And for fiscal 2021, the business expects revenue and same-store sales to increase 46% and 30%, respectively. This is a company fully in growth mode.
Over the past decade, Five Below's store count has skyrocketed from 192 in 2011 to 1,173 today. However, the leadership team isn't resting on its laurels. "As we look ahead, we are confident that we will continue to drive sustainable long-term growth while realizing our 2,500-plus store potential in the U.S.," CEO Joel Anderson highlighted in the company's third-quarter results press release. At that level of scale, you can bet that Five Below sales, margins, and profit will all be markedly higher than where they are today.
Investors have the opportunity to buy shares in Five Below right now at a reasonable valuation of just 32 times trailing 12-month earnings, near the lowest levels in the company's public history. This is a proven winner with strong momentum over the past several quarters, during a difficult operating environment, which should give investors plenty to cheer about going forward.
2. Lululemon
Step aside, Nike. There's a younger, faster-growing rival ready to steal market share in the athletic apparel industry. Lululemon has found tremendous success by creating the athleisure category, and it is now a $40 billion trendsetting business.
To prove the company's premium status, look no further than one key metric. Over the past five years, Lululemon's gross margin has far exceeded that of industry heavyweight Nike. Having a bigger direct-to-consumer presence, which accounted for some 40% of sales in the fiscal 2021 third quarter, helps to maintain strong pricing. In fact, consumers can only purchase Lululemon's merchandise on its website or at one of its 552 stores.
During the most recent quarter (ended Oct. 31), Lululemon was able to increase revenue 30% and net income 31%. And even more striking is that the men's business, at 29% growth, outpaced the women's segment, at 24% growth. This is no longer only a seller of fashionable yoga pants for females -- Lululemon is now a widely recognized lifestyle brand.
Looking ahead, Lululemon will focus on growth not only in North America but abroad as well. Of the 50 to 55 new stores that will open in fiscal 2021, 40 to 45 will be in international markets. And continuing to emphasize the men's segment, as well as the digital channel, will be vital.
The stock is down 33% from its mid-November high, giving investors an attractive entry point to scoop up shares in this booming apparel business.
3. O'Reilly Automotive
Selling automotive brakes, wipers, and batteries is a boring business, but it has resulted in O'Reilly Automotive's stock generating a 149% return over the past five years. Through the company's 5,759 domestic stores, O'Reilly is able to serve both DIY and professional customers with their immediate car repair needs. This situation has helped the business maintain its dominant position despite the threat of e-commerce players like Amazon.
Same-store sales in Q4 2021 jumped 14.5% year over year while profit soared 32%. For full year 2021, O'Reilly produced an incredible $2.5 billion in free cash flow. And the company possesses some outstanding financials, including a 52.7% gross margin and 20.9% operating margin.
O'Reilly Automotive is a steady, dependable business that will continue humming along no matter what the economic environment might be. Investors don't need to worry about GDP growth, unemployment, or interest rates. Consumers need functioning automobiles to get to work, see friends, and get errands done. This puts O'Reilly in an enviable position. The business has registered positive annual sales growth in each of the past 15 years.
As of March 4, its shares trade for a price-to-earnings (P/E) ratio of just 22, cheaper than the S&P 500's 24 multiple. Management clearly believes the shares are a great value as it has consistently used free cash flow to buy back stock. Over the past decade, O'Reilly's outstanding share count has almost been cut in half. That's a nice trend for investors to ride.
