Over the past few years, it's been hard to ignore the stocks that have doubled, tripled, or more in a short period of time. After all, the allure of making a lot of money quickly has been warping human behavior since at least the 17th century. But speculation rarely works out.
Instead, investing in businesses that grow steadily is a more sustainable way to build wealth over time. That's especially true for in-demand consumer brands with staying power. And Lululemon Athletica (LULU -0.03%) and Chipotle Mexican Grill (CMG 0.40%) are good examples. Here's why I think the stocks are great places to put $5,000 to work now.
Slow and steady wins the race
The power of compounding is amazing. Even modest annual gains can lead to tremendous growth over time, if you invest consistently.
Over the last decade, Lululemon and Chipotle have averaged 21% and 13% respective annual growth. Those aren't eye-popping numbers. Still, the cumulative effect is quite impressive.
CMG Revenue (TTM) data by YCharts.
One driver of that growth remains in place for both companies -- expanding locations. The number of Lululemon stores has grown from 211 in 2012 to 623 at the end of October. Management expects store growth as a percent to hover in the mid-teens through 2026.
Chipotle has expanded from 1,410 locations in 2012 to 3,090 this fall. And management has shared a long-term target of 7,000 restaurants.
All growth is not the same
Perhaps the most impressive part of that growth is how profitable it's been. While many hyper-growth tech companies burn cash to expand, low-tech athleisure wear and burritos have been able to generate massive returns on invested capital. It's a testament to how well management is using its capital to generate profits -- not just more sales.
LULU Return on Invested Capital data by YCharts.
Both have made shrewd investments in e-commerce that are paying off. Lululemon's direct-to-consumer sales have grown from 22% of revenue in 2017 to 42% through the first three quarters of 2022. Chipotle only launched it's updated mobile app in late 2017, when online ordering made up 8% of revenue.
Digital sales now make up 37% of food and beverage revenue. The emphasis on e-commerce has allowed Lululemon to sell more merchandise without building as many expensive stores. For Chipotle, it helps existing stores churn out even more profit.
Volatility comes with the territory
Despite the impressive track record, both stocks have had extreme ups and downs. Each has experienced multiple drawdowns of more than 40% in the past decade.
But long-term investors shouldn't be deterred. The stock price of each is up 355% over that span. Right now, they're both about 30% below recent highs.
No one knows what the economy will look like in 2023. And even if they did, they couldn't predict how stocks would react. That's why I'm betting on two debt-free consumer brands that have shown a track record of steady growth and the ability to reinvest profits at a high rate of return. If they can keep that up, the share prices of Lululemon and Chipotle will continue to rise in the years ahead.
