If a company isn't expanding its business, the long-term future is likely to be cloudy at best. That's why growth is a key factor to consider as you buy a stock, regardless of whether the stock price is $1,000, $100, or less. But growth doesn't come without some costs.
Here are two growth-oriented consumer stocks at different points of the business life cycle that are both worth a deep dive (and that are both trading at well below $100 a share).
1. Hormel: Time will heal these wounds
Hormel Foods (HRL 0.35%) is a food maker that's struggling today. Inflation, a broader industry headwind, is particularly problematic at the moment with price hikes in the fiscal first quarter of 2023 (ended Jan. 29) more than offset by an 11% volume decline. The best-performing competitors have been able to raise prices and increase volume at the same time. Hormel will, eventually, push higher prices through to protect its margins, but it clearly isn't doing as well as peers on this front right now.
Image source: Getty Images.
Also, the company's recent acquisition of Planters has, after a strong start, begun to hit a sales speed bump. Management isn't surprised by this, as the brand wasn't well supported by its prior owner, but it still has to deal with the problem. And on top of these issues, the company's Jennie-O Turkey business felt the pinch of the avian flu. While there's not much Hormel can do about this particular issue, it adds to the list of problems. Investors are downbeat on the stock, pushing it lower to the point that its dividend yield, at 2.75%, is near the high end of its historic range.
This suggests that Hormel is cheap today, not a growth opportunity. Yet the company has increased its dividend annually for over 50 years, making it a Dividend King. The average annual dividend increase over the past decade was a hefty 13%. The most recent hike of roughly 6%, made in the first quarter of 2023, is well below that, but still pretty impressive given the headwinds at play. This seems far more like a dividend growth stock that's facing temporary headwinds than a consumer staples name that's past its prime. And you can collect a historically high yield while you wait for things to get better, potentially making it an attractive growth and income play.
NYSE: HRL
Key Data Points
2. Dutch Bros: Starting from a small base
Very often, the fastest growth a company will ever see is when it first starts out, which is particularly true with restaurant brands like Dutch Bros (BROS 1.87%). The coffee company's store count increased from 453 in 2021 (the year it held its initial public offering) to 671 at the end of 2022. Revenue increased from roughly $100 million to a touch over $200 million over that span. The goal is to open another 150 stores in 2023.
This is a growth story, particularly as it relates to the company's store footprint. If it can keep opening new stores without cannibalizing its existing locations, the company's top line should continue to head higher over time. It's still a young concept as well, so there could be years of growth ahead.
NYSE: BROS
Key Data Points
What isn't exactly growing right now is earnings, because so much time and money is being put toward expansion. That's an issue to monitor, but it isn't uncommon. Growth requires investment and that generally keeps profits at young restaurant chains in the red for a while. That said, the company's net income loss narrowed materially in 2022 and it could be closing in on turning consistently profitable. When that happens investors are likely to reconsider the stock's valuation and push the shares higher. There are things that could go wrong; after all, Dutch Bros is still a very young public company, but there appears to be a solid opportunity for the store count increases to soon turn into positive earnings and, from there, this coffee house could become an attractive earnings growth story.
Old and new
There's no right or wrong way to look for and buy growth stocks. Hormel looks like what might be called a fallen angel right now, as headwinds put pressure on performance and the stock price. If those headwinds are temporary, however, this could be a great time to buy this growth and income stalwart. Dutch Bros is a young restaurant company building out its footprint, so it's probably not appropriate for conservative investors. Rapid expansion is an expensive process, but the company looks increasingly close to turning sustainably profitable. Assuming that happens, investors are likely to see this growth story in a much more favorable light than they do today.
