For its long-term buy-and-hold shareholders, Nike (NKE 0.80%) stock has been a true wealth builder. A small $1,000 investment into the sportswear and sneaker company 40 years ago would have been worth almost $1 million at the stock's peak a few years ago. However, Nike's slowing growth has been a drag on the stock's performance in recent years. The shares have returned just 40% since 2018.
There is a high correlation between a stock's long-term performance and the underlying company's revenue growth over many years. Nike was a high-growth brand a few decades ago, but not so much today. It's challenging for any company to keep growing at high rates when its annual revenue -- $51 billion in Nike's case -- already represents a large share of its total market.
By contrast, finding and investing in smaller, fast-growing brands before they go mainstream can lead to spectacular returns. Here are two rising stars I would buy over Nike now in a heartbeat.
NYSE: ELF
Key Data Points
1. e.l.f. Beauty
Shares of e.l.f. Beauty (ELF +4.17%) have surged by 677% over the last five years. e.l.f. is well on its way to becoming a leading brand in the $600 billion beauty and personal care market. The company's sales growth exploded in recent years, and it's not slowing. Sales grew 76% year over year in the most recent quarter, and it's aiming for more.
With only $765 million in trailing revenue, the business still has a high ceiling. Management sees significant opportunities to expand beyond cosmetics into skin care, as well as growth potential in international markets, and its recent growth spurt puts it in a strong financial position to take advantage of those opportunities.
The company's profit margin is still climbing, and reached almost 16% of revenue over the last year. This allowed management to spend more on marketing to win more customers, who might get excited to see their favorite cosmetics brand launch new products in more categories.
The stock looks expensive, trading at a forward price-to-earnings (P/E) ratio of 39. But if the company successfully expands into new product lines and overseas markets, there should be enough growth to push the stock even higher.
Investors shouldn't be concerned about paying a high P/E for a small company. Consider that Nike traded at a sky-high P/E of 60 in 1991, when it had more than $3 billion in annual revenue. e.l.f. may not grow as big as Nike, but it's clear that valuation is not as important as growth when projecting a stock's potential future returns.
NYSE: DECK
Key Data Points
2. Deckers Outdoor
Hoka footwear is giving Nike a run for its money, but that's just one reason investors should consider Deckers Outdoor (DECK +0.78%) stock.
Deckers stock has climbed by 376% over the last five years. Total sales soared 25% year over year in the most recent quarter, driven by balanced growth from the company's top two brands, UGG and Hoka.
However, Deckers only recently started to post high sales growth. Over the last 10 years, revenue grew at an annualized rate of just 9%, so it's unclear if the company's recent acceleration to double-digit-percentage growth is going to be persistent or not. Most of the stock's market-beating returns over the last decade can be traced to double-digit earnings growth through higher margins.
Still, one reason the stock is worth considering is the growing momentum of the UGG brand. Sales fell last year, but global demand bounced back in 2023, with UGG sales up 18% in the first half of its fiscal 2024. Management seems to have found the right formula to drive growth, using tactics such as tightening UGG inventory to create product scarcity on certain styles.
"We currently have the most cohesive, globally aligned product, marketing, and consumer targeting strategy I've ever seen for UGG," CEO David Powers said on the earnings call for its fiscal 2024 Q2 (which ended Sept. 30). Wall Street analysts expect Deckers to grow sales by 10.6% this year and 11% next year. Earnings are projected to grow by about 17% per year over the next five years.
With Hoka recently passing the milestone of $1 billion in annual sales, Deckers now has two fast-growing footwear brands that could drive the stock to new highs. For an investor looking for an under-the-radar winner, Deckers Outdoor might fit the bill. Despite the company's strong business performance, the stock trades at a reasonable forward P/E of 27.
