With soaring inflation pinching consumer wallets in recent months, the Federal Reserve is making an all-out effort to slow rising prices across the economy. But the plan to hike interest rates is causing some experts to warn of an upcoming recession. And this situation might leave investors on the sidelines for now.
It has certainly been a difficult market environment this year, but for long-term investors now may also be a great time to invest. Here are three fantastic businesses that have a high chance of turning a $1,000 investment into $2,000 by 2027.
1. Crocs
Known for selling popular foam clog shoes, Crocs (CROX -2.81%) was a surprise beneficiary throughout the pandemic as consumers turned to affordable and comfortable apparel items. Revenue in 2021 jumped 66.9% year over year.
And the strong momentum continued in the most recent quarter as sales increased 43.5% compared to the first quarter of 2021. What also stands out is that Crocs is incredibly profitable. The company's gross margin of 53.7% is better than that of one of the most widely recognized consumer brands, Apple.
Like many other fashion brands, the worry investors might have with Crocs is that it can fall out of favor with customers. There have been years in the past where sales have declined, most recently in 2015, 2016, and 2017. But management has been utilizing a very effective marketing strategy to stay relevant. Partnering with celebrities like Justin Bieber and Bad Bunny, as well as luxury fashion house Balenciaga, on various shoe designs keeps customers excited.
With Crocs' shares down 62% this year, the stock currently carries a ridiculously cheap price-to-earnings (P/E) multiple of just over four. So purely from a valuation perspective, the stock looks like a screaming buy. But if the business can achieve management's target of $1 billion in free cash flow by 2026, then the shares could easily double investors' capital.
2. Five Below
Next on the list is Five Below (FIVE 1.29%), a booming retailer that has expanded aggressively while many brick-and-mortar businesses struggle. Over the past decade, the company's store count has increased sixfold. And during the same stretch, revenue has skyrocketed tenfold. The leadership team, led by CEO Joel Anderson, sees the business having 3,500 stores by 2030, up from 1,225 today.
Specifically targeting teens and tweens (and their parents) by offering a wide range of merchandise for primarily below $5, Five Below has carved out a lucrative niche and found remarkable success in the cutthroat retail sector. And this relentless focus on affordability could help the company weather a potential recession as people trade down for cheaper products to save money.
Five Below's stellar unit economics prove that opening more stores aggressively continues to be the right strategy. A new location costs $400,000 to build and open, with four-wall earnings before interest, taxes, depreciation, and amortization of $550,000 in the first year. That's an outstanding return on investment.
During a recent investor day presentation, the business laid out a long-term financial plan, in which the goal was to more than double earnings per share by 2025. If that happens, and the P/E ratio remains the same at 24, then the stock could double before 2027.
3. Lululemon
Lululemon Athletica (LULU -1.56%), once known only for its popular women's yoga pants, has now transformed into a burgeoning lifestyle apparel business. In the most recent quarter (ended May 1), revenue and profit rose 31.6% and 31.1%, respectively, over the prior year. And over the past three years, sales in the men's segment have outpaced those for women.
Lululemon doesn't rely on third-party retailers like many other clothing companies, and this helps it maintain a strong brand presence. Its distribution strategy, combined with the fact that direct-to-consumer sales represented 45% of the overall business in Q1 2022, is why Lululemon's gross margin of 53.9% is so superb.
Looking ahead, the leadership team recently announced a new financial outlook dubbed the "Power of Three ×2" plan. By fiscal 2026, the goal is to double men's and digital sales while also quadrupling international revenue. In the most recent fiscal year, 68.7% of Lululemon's business came from the U.S., so there is ample opportunity to become a truly global brand.
What's more, the main objective is to double annual sales to $12.5 billion in fiscal 2026. Because Lululemon has historically been able to expand its profit margin as revenue rises, if this trend continues and earnings per share outpaces sales growth, the stock is well on its way to doubling even if the P/E ratio of 35 compresses slightly.
