Buying shares of high-quality businesses and giving them time to grow is a strategy that can make you much wealthier over long periods of time. This is because these companies find ways to keep their revenue and profits heading higher, which also fuels share price growth over the long run.
The retailers AutoZone (AZO -0.80%) and Five Below (FIVE -1.12%) have both outperformed the broader markets over the last five years. Let's dig into why the two companies appear positioned to do the same in the years ahead.
1. AutoZone: Emerging markets are the future
With more than 6,200 stores in the United States, over 700 stores in Mexico, and 81 stores in Brazil as of Feb. 11, AutoZone is among the largest auto parts retailers in the Western Hemisphere.
Throughout its four-plus decades in business, the auto parts retailer has prided itself on providing customers with a superior shopping experience. The company has executed well on this objective by selling a wide offering of parts to customers with the help of knowledgeable employees. This explains how a $10,000 investment in AutoZone made just five years ago would now be worth $43,000. For context, that is far more than the $16,000 that the same investment in the S&P 500 index would have grown to during that time with dividends reinvested.
AutoZone's year-to-date net sales have grown by 9.1% to $7.7 billion in the first two quarters of its fiscal year 2023 ending in August. Diluted earnings per share (EPS) grew nearly as fast, surging 8.5% higher year over year to $52.12 for the first two quarters of the fiscal year.
Looking forward, analysts anticipate that the company's diluted EPS will compound at 8.8% annually over the next five years. AutoZone's modest store count in the third and fourth largest economies in the Americas suggests that there is room to grow this store count several-fold over the long term.
Best of all, growth investors can pick up shares of the stock at a forward price-to-earnings (P/E) ratio of 18. That's hardly an unreasonable premium valuation compared to the specialty retail industry average forward P/E ratio of 15.6 when considering AutoZone's track record of market-smashing performance.
Image source: Getty Images.
2. Five Below: Nowhere near its full potential
With more than 1,300 locations in 43 U.S. states as of Jan. 28, Five Below is one of the biggest value-oriented retailers in the country. The company's $1 to $5 price points on product offerings like toys, games, and clothing primarily appeal to a customer base of teens and tweens.
This business model has paid off majorly in recent years: A $10,000 investment made in the stock just five years ago would now be valued at $27,000.
As much of a success as Five Below has been in the past, there is reason to believe that the future will be almost as bright. That's because the company is forecasting that its store count could grow to a staggering 3,500 locations as soon as 2030. This is why analysts are projecting that Five Below's earnings will grow by 19.4% annually through the next five years. Putting this into perspective, that is double the specialty retail industry average annual earnings growth prediction of 9.7%.
Yet Five Below's forward P/E ratio of 30 is less than twice the specialty retail industry average forward P/E ratio of 15.6. This is what makes the stock a buy for growth investors.
