Although it might seem awfully complicated at first glance, investing in the stock market doesn't have to be a difficult endeavor. It's all about finding great companies with the intention of owning them for a long time. And perhaps the most important thing to do is ignore the noise. As long as the businesses you own are doing well, you can benefit from having peace of mind.
That said, if you have $1,000 you're ready to invest, it's a good idea now to consider allocating that amount equally into Chipotle Mexican Grill (CMG 1.99%) and Costco Wholesale (COST 0.91%). Let's take a closer look at why these companies deserve your hard-earned savings.
Chipotle Mexican Grill
For the 2022 fourth quarter (ended Dec. 31), the Tex-Mex restaurant chain posted revenue of $2.2 billion (up 11.2% year over year) and diluted earnings per share of $8.02 (up 71%). Both numbers were impressive, no doubt, but they disappointed Wall Street analysts. Same-store sales, or comps, were up 5.6%.
What really stood out about Chipotle's quarter was how much operating leverage the company has, spreading its fixed costs over a rising sales base to boost profits. The restaurant-level operating margin was 24% in Q4, up from 20.2% in the year-earlier period. And this has been steadily expanding over recent years, a clear indicator of management's ability to drive greater efficiencies throughout the business.
Of course, two main factors are helping profitability. The success of Chipotlanes, the company's drive-through option, is noteworthy. These convenient locations are driving better restaurant sales, margins, and returns. And in the face of inflationary pressures -- namely, elevated costs for things like dairy, tortillas, and avocados -- Chipotle has successfully implemented multiple menu price hikes over the past nearly two years.
CEO Brian Niccol doesn't hesitate to highlight what he sees as Chipotle's outstanding value proposition for customers.
As measured by the popular price-to-earnings (P/E) ratio, Chipotle's current valuation definitely looks expensive at 51. But investors who plan to dollar-cost average into the stock have less to worry about as they can take advantage of different entry price points. This reduces the impact of a single purchasing decision, which benefits long-term shareholders.
And if you are worried about the valuation, it's worth keeping in mind just how wonderful of a business this really is. The story of 2022 has been one of a softer macroeconomic environment, but Chipotle continues to thrive. With plans to hire 15,000 new workers and open 255 to 285 new stores in 2023, the good times should keep rolling.
Costco Wholesale
The other stock in which you might invest half of the $1,000 is none other than top-notch retailer Costco. After posting double-digit revenue gains in fiscal 2021 and fiscal 2022, the company's sales growth has slowed to the single digits. In January, for example, revenue increased by 6.9% over the prior-year period. Nonetheless, it's hard to imagine a scenario where Costco doesn't do well in the face of heightened inflation and pinched consumer budgets.
Costco shareholders might have a near-term catalyst on the horizon that could boost the company's prospects. The last time the business raised its membership dues was in June 2017. And before that, it was in November 2011. The management team has hinted at another one happening sometime in 2023.
Higher membership fees, from which Costco generated $1 billion in its most recent fiscal quarter, can bolster the bottom line because they are a high-margin source of revenue. Furthermore, with a 92.5% renewal rate in the U.S. and Canada, there's unlikely to be a lot of customer churn. The result is a more profitable enterprise.
Similar to Chipotle, Costco's P/E multiple of 38 (as of this writing) is by no means cheap. It is, however, slightly lower than its trailing-12-month average, even though it has moved higher in 2023. But this is, without a doubt, one of the best businesses in the world. Warren Buffett's right-hand man, Charlie Munger, has long been a shareholder and said he would never sell his stock.
Owning a piece of such a durable company with strong competitive advantages and that still has a sizable growth outlook is a good thing to do with your investment money. Costco's earnings are sure to be higher in the years ahead, which will benefit your portfolio's returns.
