Despite their early increases in share price year to date, MercadoLibre (MELI -0.82%), Ulta Beauty (ULTA -2.22%), Pool Corp. (POOL 0.55%), and Coupang (CPNG -0.13%) are four of my favorite stocks to add to currently. Offering rejuvenated momentum and reasonable valuations considering their impressive track records of growth, these businesses are set to dominate their niche markets for decades.
Here is what makes these four companies my favorite strong growth stocks to buy this week.
1. MercadoLibre
After reporting its third consecutive all-time high for quarterly net income in the first quarter of 2023, Latin American e-commerce and fintech behemoth MercadoLibre has continued its ascent.
With its share price up 57% in 2023 alone, MercadoLibre's 58% sales growth (on a foreign-exchange-neutral basis) reminded investors why the company has been more than a 10-bagger over the last decade.
Although Shopify essentially bowed out of a logistical battle with Amazon in the U.S., MercadoLibre would like to remind you that it is (logistically) the Amazon of Latin America. Shipping over 302 million items, the company's shipping segment, Mercado Envíos, delivered 77% of its products within 48 hours.
Perhaps thanks to this speed, the unit's managed network penetration -- the percentage of sales made using Envíos' fulfillment, cross-docking, or flex solutions -- grew 3 percentage points to 93%. This combination of speed and widespread adoption among sellers highlights the value proposition of doing business with MercadoLibre and its already dominant logistical network.
The company's valuation likely lies somewhere in between its 18 times free cash flow (FCF) and price-to-earnings (P/E) ratio of 107. Regardless, MercadoLibre's profitability should only continue improving over the long term after it rolled out a new advertising console in Q1.
As these high-margin advertising sales -- currently only 1.4% of MercadoLibre's gross merchandise volume (GMV) -- continue outpacing GMV growth, look for profitability to continue rising, extending its substantial stock returns over the long haul.
2. Ulta Beauty
Ranking 19th on Comparably's Top 50 Brands for Gen Z report in 2022, Ulta Beauty remains a premier beauty destination for shoppers, showing no signs of fading away with the younger generation. Putting this impressive ranking in context, Ulta's brand rated higher than Starbucks, TikTok, and Instagram -- three companies with an almost cult-like following.
Thanks to this brand loyalty, it may be no surprise that the company has over 40 million Ultamate rewards members, who remarkably generate 95% of Ulta's sales. This incredible figure indicates a few things.
First, when shoppers makes their first purchase at Ulta, they tend to join the rewards program. Once in the ecosystem, these customers provide valuable data for the company to learn from -- giving it best-in-class consumer data and allowing for top-tier targeted marketing.
Providing this promotional optimization to its 40 million customers, the company keeps its beauty enthusiast customers -- who account for 83% of total beauty product spending -- locked into its rewards program. This creates a tidy flywheel effect that has continued to grow over time, as evidenced by Ulta's 18% annualized sales growth rate over the last decade.
Best yet, Ulta's massive rewards program and beloved status among Gen Z shoppers comes at a valuation below historical averages.
ULTA PE Ratio data by YCharts
Lowering its outstanding shares by 17% over the last five years and expected to grow sales by 10% next year, Ulta is a top-tier compounder to buy this week and hold forever.
3. Pool Corp.
While succinctly named Pool Corp. is up roughly 18% in 2023, it remains around 40% below its all-time highs set in 2021.
Hit by tightened consumer spending, tough comparables from a pandemic-aided sales boost, slower housing markets, and wet weather in its western markets, Pool's share price seemed to hit the reset button. However, despite reporting a 15% and 41% decline in sales and earnings per share (EPS), the company's shares remained more buoyant than at the end of 2022.
So why is there optimism surrounding these rough-looking results?
First, management believes new pool construction was down roughly 30% over the last year. This means that despite Pool seeing its own new pool construction drop 25%, it gained market share versus its peers. Furthermore, from the fourth quarter of 2022 into its most recent quarter, new pool permits increased by 4%, alluding to better days ahead.
Best yet, the cyclicality of these new pool sales isn't a significant hindrance, as they only account for 17% of Pool's sales. Generating 83% of its sales from non-discretionary areas such as retail, maintenance, upgrade, and renovation, the company maintains a steady flow of recurring revenue regardless of the economy.
The stock trades at 21 times earnings, much cheaper than its 10-year average of 30, making now the time to consider buying the rebounding market leader.
4. Coupang
Much like MercadoLibre is the dominant e-commerce player in Latin America, Coupang leads the way in South Korea. However, what sets the young company apart from its massive Latin American peer is the much higher population density of its home country.
For example, MercadoLibre's largest market, Brazil, has a population density of 25 people per kilometer. Meanwhile, South Korea's density is 21 times that figure. This is important to investors for two reasons.
First, it means the company could provide superior profitability by creating a fully optimized logistical network across South Korea. Whether for e-commerce or food and grocery delivery, this dense population could drive a scale-of-efficiency benefit.
Similarly, the country's high population density means that it only has 10% of the retail space per capita compared to the United States, for example. This discrepancy means Coupang could offer products many South Korean shoppers can't find in person.
Boosting its FCF generation thanks to the aforementioned efficiencies, Coupang generated nearly $900 million in FCF over its last two quarters, compared to its market cap of $28 billion. It may be time to take notice of Coupang's burgeoning cash-generating prowess.
