Wall Street has its share of contradictions, like the fact that a stock rising in price actually increases the demand for that stock, and vice versa. It appears that investors like to own perceived winners and tend to avoid perceived losers. This contradiction goes some way to explaining the wild momentum and volatility seen in the growth stock sector.
Veteran investors know that it doesn't pay off over the long term to blindly chase returns. They also know that sometimes a stock's rally can be a signal of enduring competitive strengths. And in the best-case scenario, this value is underappreciated by most of Wall Street and they can take advantage.
That appears to be the situation for Lululemon Athletica (LULU 1.31%) and Garmin (GRMN 0.29%), two stocks that have much more room to grow from here.
1. Lululemon
Thanks to a 20%-plus gain in 2023, Lululemon shares are approaching the all-time highs they set in 2021 when overall markets were soaring. There are excellent reasons for this rally. The retailer announced in late August that Q2 sales jumped 20% year over year after accounting for currency exchange rate swings. This growth came from a healthy mix of rising traffic at stores and in the online segment. Lululemon is also getting a big assist from its international business, which soared 52% year over year in Q2.
The chain's finances are stellar. Gross profit margin expanded by 2 percentage points last quarter and sits well ahead of Nike's level. Lululemon isn't struggling with the same promotion challenges that are pressuring the footwear giant's earnings. Instead, operating profit margin edged up to 22% of sales compared to Nike's 11% rate.
These wins would all be threatened by a sharp consumer spending slowdown, of course. But Lululemon's success amid the current tough selling environment illustrates its pricing power and its many avenues for growth ahead in areas like international expansion and the entrance into new product niches and demographics.
2. Garmin
As any follower of Apple knows, unusually high profit margins can be a sign of enduring competitive advantages in the tech hardware space. Garmin delivers on this promise.
Operating income jumped to $270 million last quarter, up 13% year over year. That boost allowed the GPS device giant to convert over 21% of sales into operating earnings. "We delivered outstanding performance in the third quarter," CEO Cliff Pemble said in early November.
That strong performance was powered by a steady stream of popular product introductions across Garmin's deep portfolio that spans fitness trackers and smartwatches along with more complicated platforms in marine and aviation navigation. Four of its five product categories expanded last quarter, translating into a 12% increase for the full portfolio.
Garmin's stock valuation hit a new 2023 high recently after the company raised its 2023 sales and earnings forecasts. But there's still room for this growth stock to deliver great returns for patient investors.
Garmin has a packed pipeline of product releases set for the coming year that's likely to continue its streak of annual sales gains that was only briefly interrupted during the pandemic growth hangover in 2022. And, with strong cash flow and nearly $3 billion of cash on the books today, returns should be amplified by more dividend payments and stock buyback spending. Don't let the stock's 2023 rally turn you off from such a high-performing, well-funded business.
