Although the S&P 500 is still down about 14% from its all-time high, there are some stocks out there that have held up particularly well, as their underlying businesses continue to perform nicely amid the macroeconomic uncertainty. While it might be tempting to buy shares regardless of the valuation, the real reward comes from practicing patience and waiting for the right price.
If the market presents investors with an opportunity, and these three stocks take a dip, investors should consider being buyers. Let's take a closer look at what companies I'm talking about. The hope is that you are well prepared should prices drop.
1. Costco
With a trailing-five-year return of 170%, Costco Wholesale (COST 1.01%) has been a wonderful stock for investors' portfolios. That kind of price appreciation means that shares likely aren't cheap. As of this writing, the stock trades at a price-to-earnings (P/E) ratio of about 37.
It's no surprise that investors love the stock so much. For starters, this business puts its customers above everything else. By leveraging its massive scale (Costco is the world's third-largest retailer), the company can negotiate better pricing for its merchandise from suppliers, and these savings are always passed on to customers in the form of lower prices. The typical product is marked up just 11% at one of Costco's 850 warehouses, far lower than at other big-box retailers.
But not just anyone can shop here. Customers must pay an annual membership fee to visit Costco stores. During the most recent quarter (Q2 2023 ended Feb. 12), membership fee revenue of just over $1 billion was up 6.2% year over year. Costco now counts 68.1 million membership households, a number that should keep rising. Not only does this provide a high-margin source of revenue for Costco, but it drives customer loyalty, a key benefit in a competitive industry.
2. Chipotle Mexican Grill
Next is Chipotle Mexican Grill (CMG 2.41%). The leading Tex-Mex chain has seen its shares soar 435% over the past five years, a terrific return not just for a restaurant stock, but for any business. This means shares are expensive, selling at a steep P/E of 54 right now.
In 2022, Chipotle increased revenue 14.4% to $8.6 billion. Comparable sales were up 8%. And despite inflationary headwinds for food and paper products, as well as labor, the company's operating margin of 13.4% last year was up substantially from the prior year. Chipotle is growing, but in a very profitable manner. Even more impressive, it looks like the business was completely unfazed by the pandemic, leaning heavily on its technological capabilities to serve customers.
Last year, the business opened 236 new locations, bringing the total store count to 3,187 as of Dec. 31, 2022. That's a healthy gain no doubt, but the management team, led by CEO Brian Niccol, believes there is a huge expansionary runway ahead. They are optimistic that Chipotle can have at least 7,000 locations in North America one day, translating to more than double the current footprint. That's something shareholders can get excited about.
3. Lululemon
Lululemon (LULU 1.31%) rounds out this list of stocks to buy if they take a dip. The athleisure pioneer's stock is up 304% over the trailing five years, crushing its bigger foe Nike by a wide margin. This outperformance has resulted in Lululemon's current P/E ratio being 55. Therefore, it's best for investors to wait for a pullback.
One of Lululemon's key drivers of success is its powerful brand. There is no question that this company sells premium clothing and footwear, which supported a high gross margin of 55.1% in the last quarter. Boosting Lululemon's brand is the fact that the company mainly sells its products through its company-operated stores and website. In 2022, 46% of overall sales were from the digital channel, which helps preserve margins even more.
The business recently reported outstanding financial results, as sales in its fiscal fourth quarter (ended Jan. 29) increased 30% year over year. Adjusted earnings per share rose 31% compared to Q4 2021. And Lululemon was able to open 32 net new stores during the three-month period. This strong financial performance continues a long-running trend of outsized gains for the apparel business. With lots of growth on the horizon, Lululemon is one to keep on your watch list.
