This year hasn't been an easy one for investors as the stock market has been battling pressure from soaring inflation, rising interest rates, and a softening macroeconomic backdrop. As of this writing, the S&P 500 is down 21% in 2022 after being up 29% in 2021 and 18% in 2020.
But amid the market's weakness, there are still some stocks of great businesses that appear richly valued. If these three companies see their share prices fall, investors should be quick to buy.
1. Chipotle Mexican Grill
A surprising winner throughout the pandemic, Chipotle Mexican Grill (CMG -1.34%) continues to post strong results, generating revenue and diluted earnings per share of $2.2 billion and $9.20, respectively, in the most recent quarter (ended Sept. 30). Both figures were up double-digit percentages over the prior-year period.
Like many companies, Chipotle is facing rising costs for key inputs. In this case, the business is paying more for dairy, packaging, tortillas, and avocados. But compared to the third quarter of 2021, the operating margin expanded by 2.8 percentage points thanks to Chipotle's proven pricing power. Management has been able to raise menu prices four times in the past 17 months, with demand remaining healthy.
By the end of 2022, the company plans to have opened 235 to 250 new stores for the full year. And next year, the plan is to open 255 to 285 new locations. Longer term, the leadership team has set a target of 7,000 stores in North America, more than double the current footprint.
As of this writing, Chipotle's stock trades at an expensive price-to-earnings (P/E) ratio of 48, which is far greater than other top restaurant businesses like Domino's Pizza and Starbucks. But Chipotle is clearly an outstanding company with solid growth prospects, so the premium valuation might be somewhat justified. Nonetheless, I think investors would be better off waiting for a pullback before buying the stock.
2. Costco Wholesale
In the latest fiscal year, which ended Aug. 28, Costco Wholesale (COST -0.11%) posted net revenue growth of 16% and profit growth of 17%, demonstrating consumers' increased affinity for the amazing value the company's 842 warehouses offer at a time when budgets are becoming more constrained. Same-store sales, a key metric for shareholders to follow, rose 14.4% on a year-over-year basis. That's incredibly strong.
Costco's gargantuan scale, exemplified by fiscal 2022 total revenue of $227 billion, allows the business to flex its bargaining power with suppliers, leading to lower costs for merchandise. The result is lower prices for customers. The company counted 65.8 million membership households as of Aug. 28, up 6.5% from the fourth quarter of fiscal 2021. And the renewal rate was a stellar 92.6% in the U.S. and Canada.
Right now, Costco shares are selling at a P/E of 37, which is more expensive than its 10-year average. The stocks of competitors Walmart and Target are cheaper than Costco's, but based on recent financial results, these companies aren't in the same category of quality as the warehouse club operator.
But right now, I believe buying Costco's stock provides investors with no margin of safety, no matter how well-positioned the business is in the deteriorating economic environment. Put this one on the watch list for now.
3. Lululemon Athletica
The company that is registering the fastest growth on this list is Lululemon Athletica (LULU 1.74%), which saw revenue jump 29% in the latest quarter (ended July 31) compared to the same period last year. The burgeoning apparel business is quickly becoming a top consumer choice, as Piper Sandler's fall 2022 Taking Stock With Teens survey showed that Lululemon was the second-most popular clothing brand among the gen Z demographic.
While other growth stocks struggle with profitability, Lululemon has no problem in this department. The business had a superb gross margin of 56.5% and operating margin of 21.5% in the last fiscal quarter. Besides investing in e-commerce capabilities, product innovation, and new store openings, the company has been able to reduce its share count over the past several years with stock buybacks.
Lululemon's current P/E multiple of 37 is higher than its bigger rival Nike's valuation. But Lululemon has seriously brighter growth prospects. By 2026, the management team expects annual sales of $12.5 billion, double fiscal 2021's total. By boosting the digital business, men's segment, and international revenue, Lululemon should be able to attain this goal.
However, I still believe prospective investors should practice patience. Lululemon is a wonderful success story in the cutthroat apparel industry, and its valuation reflects this success. For investors to increase their chances to achieve market-beating returns with this stock, it's best to wait on the sidelines for a dip.
