2022 has been a difficult year for investors, with the Nasdaq Composite down 30% year to date. Like every previous sell-off, some otherwise solid stocks have been caught up in the broader sell-off and are waiting to rebound off the bottom.
A simple strategy to find stocks that could take off in the next bull market is to focus on revenue growth. Look for companies that are maintaining strong sales momentum, as this will point you toward the stocks that will likely see the most upside once market sentiment turns positive.
Strong business momentum hasn't kept shares of Lovesac (LOVE 0.55%) and Lululemon Athletica (LULU 0.80%) from falling recently, but let's look at why these stocks could easily double in value over the next three to five years.
1. Lovesac
The great thing about market downturns is that you can buy shares of companies increasing revenue at 56% for a cheap valuation of 11 times earnings. That's how fast modular furniture maker Lovesac grew sales in the last quarter. It is seeing tremendous demand for its sectional sofas -- or Sactionals, as it calls them -- and it's no fluke. Lovesac not only reported accelerating growth over the previous quarter, but it has averaged an annual revenue growth rate of 45% over the past three years.
Lovesac has become popular for its simple, high-tech approach to designing sectionals. Customers can start with a single chair and customize their arrangement with additional purchases. In October, the company launched the StealthTech line of Sactionals that includes embedded surround-sound speakers and wireless charging.
This is high-tech furniture, but the important thing is that Lovesac is winning over customers with a simple product line, which lends to a profitable business model. The company spends over 10% of its revenue on marketing but mainly relies on word of mouth and a direct sales model through its website. Over the last year, Lovesac earned a profit margin of 9%, which is good in this cutthroat business. It certainly compares favorably to other e-commerce home goods stores like Wayfair, which has been reporting declines in revenue while losing money.
What's more, Lovesac just turned a profit two years ago, and its profit margin has been trending up over the past year. The combination of high revenue growth and improving profitability is the perfect recipe for a potentially rewarding investment. At its current valuation, the stock could even double over the next five years, since moving from a price-to-earnings ratio of 11 to a market average 20 times earnings would produce nearly a 100% return on investment from the current stock price.
2. Lululemon
Lululemon is a moving freight train in the global athletic wear market. It has been growing since opening its first store in Vancouver more than two decades ago and now has over 500 stores worldwide. A $10,000 investment in 2017 would already be worth $53,000. It may not perform that well from here, but there's a good chance it can double again within the next five years.
Lululemon reported year-over-year revenue growth of 32% in fiscal Q1, an acceleration over the 23% increase it posted in the previous quarter. This exceeds the 27% average annual growth rate over the last five years.
It's no secret what is driving such strong results. Lululemon continues to release new styles that meet the needs of its customers. The company is seeing balanced growth across women's and men's products, as well as growth across all of its core activities: yoga, run, train, and everyday wear.
After meeting its previous five-year growth goal, management is calling for revenue to double again by 2026. Lululemon is still early in its long-term growth potential. It just launched its first footwear line in March, which could be a huge growth opportunity in an expanding $60 billion footwear industry.
While the stock's current P/E of 37 is not cheap, Lululemon's record of growth and future opportunities are deserving of a premium. Lululemon has been winning over customers with comfortable athletic wear for years. By doing so, it has built one of the strongest brands in retail. With management applying its Science of Feel design philosophy to footwear and new activities like golf and tennis, it's a good bet that Lululemon will meet or exceed its five-year growth goal again and double shareholders' investment.
