Many of the top consumer brands people use every day, mega brands such as Coca-Cola, Starbucks, and Walmart, were once small, fast-growing companies. Earlier in their existence, these were high-growth stocks and they made early investors a fortune.
If you want to find tomorrow's winners, it helps to look at a company's record of growing revenue -- the faster and more consistent the better. Almost every company will show lower growth during a tough economy, but you want to see high rates of growth over many years.
Three Motley Fool contributors have done the hard work for you and identified Cava Group (CAVA 10.50%), Lithia Motors (LAD 1.94%), and Revolve (RVLV 1.96%) as three high-growth stocks that could soar in the years to come.
This stock won't stay down for long
Jennifer Saibil (Cava): Cava has been one of the big initial public offerings (IPO) in a what has been a dry year for IPOs. Although the price soared off of investor enthusiasm, it's now up just 3% from its first-day closing price. Still, there are reasons to think Cava can soar and be a multi-bagger over the next few years.
First of all, Cava already demonstrates the compelling ideal of high comps growth and profitability. It's uncertain whether or not the company can keep this up consistently, but having both in its first quarterly report as a public company is a great start.
What can happen with IPO stocks is that they get close to breakeven when they go public, and then they end up spending too much money to scale, cutting into their profitability. What you want to see with young companies is that scaling helps them achieve profitability, rather than putting them further in the red.
Sales increased 64% over last year in the 2023 second quarter. But the really impressive part was an 18% increase in comparable sales. That means customers are happy and sticking around to buy more, and all the growth isn't coming from new stores. Management admitted that some of that was due to the hype around the IPO, as well as the residual effects of previous price increases. It's guiding for that to pull back in the second half of the year, and for full-year comps growth of 13% to 15%, which is still strong. However, that guidance takes into account the above-level second-quarter comps, which means the remainder of the year could be significantly lower. Still, this is a pressured macroenvironment, and comps should stay strong as the economy recovers.
Cava only operates 287 restaurants, which is small compared to many of its competitors: Chipotle Mexican Grill has over 3,000 restaurants, while Shake Shack owns 471. It sees the potential to reach 1,000 stores by 2032, giving it a significant growth runway on top of comps growth, and giving investors a great opportunity to benefit from owning the stock.
Gobbling up the largest retail sector
John Ballard (Lithia Motors): One way to find stocks that could soar is to look for relatively small companies that are consolidating large industries. By consolidating, I mean making a series of acquisitions that helps the business gain share of its industry.
Lithia Motors operates one of the largest networks of auto dealerships in the U.S., with $28 billion in revenue in 2022. Lithia has a stellar track record of growing earnings and delivering market-beating returns to investors.
Over the last decade, Lithia Motors grew revenue and earnings per share at an average annual rate of 24% and 30%, respectively. Likewise, the stock price is up 368%, doubling the return of the S&P 500 index.
What makes Lithia Motors such a great stock to consider is that it is profitably growing in the largest retail sector in North America, and the stock trades at a bargain valuation. The used and new auto market is estimated at over $1 trillion. Lithia's trailing 12-month revenue was $29 billion through the second quarter, so it has a long runway of growth.
However, the recent weakness in car sales due to higher interest rates means investors can buy the stock at a forward price-to-earnings (P/E) ratio of 8.1 -- a bargain valuation for any growing business. The company reported a 12% year-over-year increase in revenue last quarter, but adjusted earnings were down 10%. Overall, those are relatively strong numbers in the face of industry headwinds.
The stock traded at an even lower P/E in 2022 of 4.5, so Wall Street is already catching on to the opportunity here. Lithia Motors could soar from these lower share prices if interest rates come down, making the cost of purchasing a car more affordable for consumers. The company is profitable and could find acquisition opportunities on the cheap in this environment to profitably grow the business over the long term.
Don't be fooled by the slowdown
Jeremy Bowman (Revolve Group): It's hard to call Revolve Group a high-growth stock if you look at its most recent earnings report.
Revenue fell 6% year over year to $273.7 million, and its generally accepted accounting principles (GAAP) profit fell by more than half. It also continued to report a loss on a free cash flow basis.
However, those results are more a reflection of the macroeconomic climate than any company-specific challenges.
Revolve, an online apparel retailer that uses social media influencers to sell to millennials and Gen Z, faces similar challenges to other e-commerce companies and consumer discretionary retailers. It also faces difficult comparisons from the period at the end of the pandemic when sales soared as the economy reopened and young people could go to social events again.
Management itself said in the second-quarter report, "Aspirational consumer discretionary spending remains challenging, particularly on goods in the U.S., for our younger customer demographic." However, those headwinds won't last forever, and the company should return to steady growth, benefiting from the opportunity in e-commerce, as well as the large addressable market in apparel.
The good news is that the company is still profitable despite those challenges, and the stock looks very reasonably priced as the market seems to be betting against a return to growth. Revolve also has a strong balance sheet with $269 million in cash and no debt, and it just announced a $100 million share buyback program, which would reduce shares outstanding by 9%.
Revolve stock trades down by more than 80% from its all-time high, and a return to profitable growth could be enough to make the stock soar. At its current price-to-sales ratio of just 1, Revolve has the potential to go parabolic if it can regain its status as a growth stock.
