After a disappointing year for stocks in 2022, the markets have rebounded this year. The best way to ensure you're always a step ahead of Wall Street is to hold shares of quality companies with great prospects for long-term growth.
Chipotle Mexican Grill (CMG 2.41%) and Carnival (CCL -0.66%) are up 53% and 138%, respectively, year to date but could have more gains in store for investors after recently posting solid earnings results. Another timely stock to consider buying this month is Ulta Beauty (ULTA -0.40%), which saw its share price drop after its latest earnings report and could be undervalued.
Let's see why three Motley Fool contributors believe these stocks are well-positioned for long-term gains.
A high-growth restaurant
John Ballard (Chipotle Mexican Grill): Chipotle has been a stellar performer for shareholders over the last decade. The stock returned 450%, beating the major indexes, as the company grew revenue and earnings at double-digit percentages on an annualized basis.
The stock has good prospects to beat the market again. Chipotle continues to put up similar numbers, with last quarter's revenue increasing by 17% year over year. While the stock's price-to-earnings ratio of 57 might look expensive, the company's performance on the bottom line justifies investors paying up.
Chipotle reported a robust 84% year-over-year increase in adjusted earnings per share last quarter. This was primarily driven by a higher operating margin, resulting from menu price increases and lower avocado prices.
Inflation is still a wild card and could come back to pressure margins later in the year, but Chipotle is demonstrating it has tremendous pricing power, which is a valuable tool for management to maintain high margins. If Chipotle continues to come up with new menu ideas and sticks to its unique branding of "food with integrity," it should continue to win a sizable share of consumers' wallets.
Obviously, the stock isn't trading at a bargain valuation, so investors might want to start with a small position in their portfolios, just in case a disappointing quarter sends the stock down. But this is a great growth stock to hold for the long haul. Chipotle has proven to be a very well-managed restaurant chain that delivers the performance investors need to build lasting wealth.
Ride the travel boom
Jeremy Bowman (Carnival): Carnival, the world's largest cruise line operator, has been one of the top-performing stocks on the market this year. And it's easy to see why. The travel stock was hit hard by the pandemic like the rest of the cruise industry but is staging a strong comeback this year, paced by record bookings and customer deposits as it demonstrated in its earnings report at the end of June.
The company said customer deposits reached a record of $7.2 billion, topping its previous record of $6 billion in the same quarter in 2019. It reported a better-than-expected adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) profit of $681 million, though it's still losing money on a generally accepted accounting principles (GAAP) basis.
Carnival raised its full-year guidance, calling for $4.1 billion-$4.25 billion in adjusted EBITDA, but the main reason why the stock looks like a smart buy right now is the introduction of its SEA Change Program. This is a set of goals for 2026 that include a 50% increase in adjusted EBITDA per available passenger berth day (ALBD/APBD) and an adjusted return on invested capital (ROIC) of 12%. More importantly, the company is aiming to reach investment-grade leverage metrics and steadily pay down its debt with cash flow, putting it on a long-term recovery path.
The company is experiencing a boom in demand, even during a weak global economy, which bodes well for future growth. The shift to remote work and retiring baby boomers should drive demand, as well.
With shares down 70% from pre-pandemic levels, the stock still has plenty of room for upside.
A shortsighted market reaction creates an investing opportunity
Jennifer Saibil (Ulta Beauty): Ulta Beauty is the largest cosmetic retail chain in the U.S., with over 1,350 stores. It stands out not only because of its size but because it offers a large range of price points that appeal to all of its customers. It carries 25,000 products from 600 brands.
Ulta has a unique image because most retailers target either mass consumers or the upscale shopper. Ulta has successfully targeted every beauty shopper, and that may be a feature that's unique to the beauty industry. Since even expensive beauty products tend to be lower priced than, say, handbags, they're the kind of cheap luxury item even a frugal shopper might splurge on.
It's different in other ways, as well, due to the services it offers in many of its stores, such as hairstyling. The total picture is a popular brand that resonates with a customer base that loves everything beauty and can find it at Ulta.
Although the company's quite a ubiquitous presence, it's still finding ways to grow and capture market share. It recently started a partnership with Target for Ulta stores-in-stores, with 355 current shops. This gives it exposure to a new kind of customer who might not have stepped into a stand-alone Ulta before, and also presents greater opportunities for loyal members to shop more frequently. The company still sees more expansion possibilities for U.S. stores.
Ulta demonstrates consistent sales growth, including a 12% sales increase year over year with a 9% increase in comps in the 2023 first quarter. It's also still boosting profitability, with a 9% increase in earnings per share.
However, Ulta's stock price tanked after the report, dropping almost 17% in a matter of days. Investors honed in on management revising its full-year outlook for operating margin lower than previous guidance, from 14.7% to 15% to 14.5% to 14.8%.
It was curious that it caused such a backlash, considering that's in line with or better than historical levels. Ulta has done an incredible job increasing margins over the years, and this doesn't look worrisome. It also raised its outlook for full-year revenue after the report.
Ulta stock has outperformed the S&P 500 by a wide margin over time and is well-positioned to do it again. Investors can use this dip to buy now at a great price.
