The stock market just finished one of its worst years in over a decade. High inflation, rising interest rates, and talks of a pending recession have some investors wondering if it's the right time to invest. But if you have the cash available, there are always growing companies worth investing in.
Two stocks to buy now that could deliver multibagger returns over time are Dutch Bros (BROS -0.97%) and Five Below (FIVE 0.51%). Here's why I wouldn't hesitate to add them to my portfolio right now.
1. Dutch Bros
Every decade a new restaurant concept comes along that breaks the code on how to deliver returns in a crowded industry. Legendary investor Peter Lynch made a career identifying fast-growing companies while they were small, especially in the retail and restaurant industries. Dutch Bros is the type of stock Lynch would love.
Last year, Dutch Bros grew revenue by nearly 50% in a challenging macro environment. It has a consistent operating culture across the states where it operates, and it offers a customizable menu of hot and cold beverages that customers love, offered with friendly service. The best part is that Dutch Bros has only penetrated a fraction of its store-opening opportunity.
The company ended 2022 with 671 locations across 14 states, but management is targeting 4,000 shops over the next 10 to 15 years. With a market cap of less than $2 billion, its future growth seems significantly undervalued by the market. That represents a price-to-sales (P/S) ratio of just 2.38, less than half the P/S multiple of Chipotle Mexican Grill.
Data by YCharts
A key aspect of Dutch Bros' success is consistency. Maintaining the same experience across geographies is what separates a world-class fast-service restaurant like McDonald's from the also-rans. In 2008, Dutch Bros shifted to only open new locations through franchise partners already within the company's system. This has been a game changer for the company and is why investors can expect Dutch Bros to potentially reach elite status as a world-class restaurant operation over time.
The pessimism surrounding the markets right now is a perfect opportunity to buy shares of Dutch Bros before its growth prospects are recognized by more investors. This small-cap stock is selling well below what it will be worth in another 10 years.
2. Five Below
Five Below is another promising growth story. The company has been slowly expanding across the country over the last 20 years. A $1,000 investment at the company's initial public offering in 2012 would already be worth over $7,500, but it still has a long way to go before reaching its potential.
The company distinguishes itself by offering a fun environment for kids to shop for quality merchandise across a range of categories, from candy to games and toys, for around $5 or less. It's a proven strategy that has delivered tremendous growth in sales and profits.
Five Below has been so successful that it has started to stretch its opportunity to items priced above $5, or what it calls Five Beyond. This has helped the company expand its sales opportunity to higher-end products in technology and computing accessories, although the business hasn't been immune to the macroeconomic challenges over the last year. Through the first three quarters of fiscal 2022, sales increased just 5.5% year over year, with same-store sales down 4%.
FIVE Revenue (Quarterly) data by YCharts
Investors shouldn't be concerned about last year's performance since high inflation won't always be a problem in the economy. There's still a lot of room for further expansion. Consider that Five Below ended October 2022 with 1,292 stores, but there are still plenty of opportunities to open stores in large cities and rural areas. Management's long-term target is over 3,500 stores, which provides ample room for more growth and returns for investors.
As the company continues to open more stores and returns to more consistent same-store sales performance, management believes it can double sales and earnings by 2025. While a severe recession would likely push back that timeline, the most important thing is that the opportunity is there for growth investors to make a great return holding the shares.
This explains why the stock has jumped about 13% year to date despite the company's recent sales performance. The shares currently trade at around 35 times this year's earnings estimate, but the company has such a great track record of profitably opening new stores and appealing to a wide demographic of customers at all income levels that investors shouldn't be too picky on valuation here. This is a quality growth stock worth holding until retirement.
