Even with all the ups and downs of the markets, stocks are one of the best ways to build wealth. The S&P 500 index has returned an average of 10% per year since 1926.
Investing in companies with above-average growth prospects can stack the odds in your favor of doing much better than the market averages. It's not that difficult to earn around 12% or better in a group of well selected growth stocks and this slightly higher return would be all that is needed to triple your money in 10 years.
It makes sense that you should look for companies that can grow their annual revenue much faster than your return target. It will only increase your chances of achieving your investment goals.
Here are two growth stocks I would consider buying today with $3,000 of extra cash that's not needed for bills in the short or medium term.
Etsy
Etsy (ETSY 0.34%) was a fast-growing business through 2021, when it posted a revenue increase of 35% for the year. But it has struggled to resume its momentum amid higher inflation. Revenue grew 9% year over year through the first half of 2023, driven by higher transaction fees, but it's still performing well below its potential.
The good thing about the weaker growth is that it's helped push shares down and investors can now buy shares at a very attractive valuation. Valuing a business is not an exact science, but Etsy's current forward price-to-earnings (P/E) ratio of 17.3, which is well below the average of stocks in the S&P 500, is a clue that the market is undervaluing the business.
There are a few reasons investors can expect Etsy to grow faster over the long term and earn a higher P/E. First, it is still growing its base of buyers and sellers. It already has an enormous reach, with over 96 million active buyers, but active sellers grew 12% year over year to 8.3 million in the second quarter. A growing pool of sellers and buyers suggest there is more demand for what Etsy is offering than recent declines in gross merchandise sales suggest.
Another opportunity that doesn't get attention on Wall Street is the exploding demand for secondhand clothing, which is projected to nearly double to $350 billion by 2027, according to research from ThredUp. While Etsy downsized its wardrobe recently by selling the Brazil-based Elo7, it still owns Depop, a popular resale marketplace for streetwear and vintage apparel.
Depop reported an acceleration in U.S. gross merchandise sales of more than 25 percentage points through the first half of 2023, which indicates the brand is gaining market share in a crowded field.
Etsy credited Depop's growth to recent improvements in the shopping experience and better marketing efficiency. As management applies a similar playbook to the core Etsy marketplace, similar results could follow across the business. The company has been investing in machine learning, a form of artificial intelligence, to make its search and recommendation results smarter to help buyers find what they are looking for.
All said, Etsy should be able to maintain top-line growth between 10% and 15% over the long term. It's still a relatively small e-commerce company with a lot of room for growth. A higher valuation would lead to even better returns than its underlying business growth and easily deliver a triple for investors over the next decade.
Cava Group
Cava Group (CAVA 10.50%) is a fast-growing restaurant chain of Mediterranean cuisine. The stock is up 5% since its initial public offering in June. While the company is unprofitable and the stock trades at an expensive valuation, it could still deliver the returns investors are looking for thanks to strong revenue growth.
Cava currently sports a market cap of $5.4 billion, which translates to a price-to-sales (P/S) ratio of 8.2 on its trailing-12-month revenue. That is higher than Chipotle's P/S ratio of 5.5, but Cava is also expanding at a faster clip.
Its restaurant footprint increased from 22 locations in 2016 to 263 through the end of the first quarter. That translated to annualized revenue growth of 52% through fiscal 2022, and there is more growth to come.
There are many Mediterranean restaurants scattered around the U.S., so there is already a massive addressable market for Cava's menu. Management is targeting 1,000 locations. That could be conservative, but that would still grow Cava's revenue nearly four-fold, or about 15% per year, if things stay on course.
Of course, Cava could grow revenue even faster if it maintains strong growth in same-restaurant sales. The company is already putting together an impressive record, with comp sales growing 14% in fiscal 2022 and 28% in the first quarter of fiscal 2023.
Investors shouldn't expect the market to always reward the company with a high valuation. But given Cava's long runway of growth ahead, I believe it is likely to grow revenue at 20% per year or better over the next decade. That should be plenty to deliver a three-fold return, even if the market is paying a lower valuation for the stock in 10 years.
