While index investing has its merits, some people want to take the time to find individual companies to put their money in. The goal is to find stocks that can beat the market. Today, I've got two potential market-beaters for your consideration.
If you've got $5,000 that you don't need to pay off monthly bills, bolster an emergency fund, or pay down short-term debt, you might want to put it toward an investment in the stock market. More specifically, you might want to use it to buy shares of Crocs (CROX 1.53%) and Lululemon (LULU 1.31%).
Let's discuss these two stocks further and find out why it might be a good idea to split that investment evenly between these two consumer discretionary stocks.
1. Crocs: diversifying its product offering
Crocs is well known for its famous foam clog, which gets a lot of love and/or hate depending on your style preferences. This single product, representing the bulk of company revenue, manages to produce strong financial performances for Crocs, as revenue and earnings have both soared between 2019 and 2022.
In an effort to find ways to diversify the product offering, management spent $2.5 billion to acquire casual footwear maker HeyDude in December 2021. HeyDude itself is growing rapidly, generating $239 million in sales last quarter (the second quarter of 2023 ended June 30), a figure that was double that of two years ago. The performance of this brand exceeds even management's own lofty initial expectations.
Investors probably don't realize just how profitable this company is. Crocs was able to increase operating income by 28.4% year over year in the latest period -- Q2 2023 -- to $318.5 million. This translates to a stellar operating margin of 29.7%.
Despite strong growth and profit trends, Crocs shares trade at absurdly cheap valuations right now. They trade for a trailing price-to-earnings (P/E) ratio of 8.1. That's not only below the stock's trailing three-year average; it represents a massive discount to the S&P 500 index's P/E multiple of 20. When it seems like the share prices of some of the top companies out there are trading at steep valuations, Crocs provides a rare screaming opportunity.
Maybe the reason investors haven't bid up the stock is because they question the brand's durability. This is a valid concern, especially in the sometimes fickle apparel and footwear industries. It seems that the exceptions to the rule are the brands that have sustainable relevancy among consumers. What if interest in Crocs' products wanes in the near future? That would deal a blow to its financials.
That's why the leadership team really emphasized its marketing strategy by targeting a younger, digitally native demographic. Moreover, Crocs enacted numerous partnerships with various brands and high-profile celebrities to keep its clogs top of mind among consumers. This should help maintain the brand's standing.
2. Lululemon: lots of growth and profit potential
In a bit of a parallel to Crocs, Lululemon's initial success was dependent on a single product: upscale women's yoga pants. Catering to an underserved niche of the overall athletic apparel market brought the company to the mainstream. Today, Lululemon is a household name that not only caters to female customers but to men as well.
Lululemon's resilience is what's most impressive. After taking an initial negative hit at the onset of the coronavirus pandemic with temporary store closures, Lululemon has registered 12 consecutive quarters of greater than 18% year-over-year sales growth, a streak that is still going. That's a sign of truly outstanding business momentum, despite other headwinds like supply chain bottlenecks, elevated inflation, and the current uncertain economic environment that have hurt other sports apparel companies.
Profitability is also through the roof. Diluted earnings per share soared from $0.71 in the fiscal 2018 second quarter five years ago to $2.68 in the most recent quarter (Q2 2023 ended July 30). Selling hugely popular and premium merchandise allowed Lululemon to expand its bottom line as its revenue grew.
Looking ahead, there's a lot to get excited about. The company's "Power of 3 x2" strategy, introduced in April last year, emphasizes boosting men's, digital, and international sales, with the goal of hitting $12.5 billion of revenue in fiscal 2026. That figure would be double the total from fiscal 2021.
Of course, the key to Lululemon's expansion plans is to open more stores, even though it consistently generates more than 40% of revenue from digital channels. There are 672 locations across the world. Management plans to open 23 net new stores in the current fiscal quarter.
China looks to be a massive opportunity. The country only accounted for 13% of company sales in Q2. But revenue there was up 61% year over year in the last quarter.
While Lululemon shares aren't anywhere close to being as cheap as Crocs shares, investors might still find it worthwhile to pay for a P/E ratio of 49.1 to buy stock of such a booming business.
