Stock market news is dominated by mega-cap tech stocks that have an enormous influence on how the market moves. These companies are also often accompanied by investors' stories about how they've held shares for decades and watched the companies grow and reward shareholders. The key to those stories is that investors who have done the best are the ones who bought shares before the companies were household names.
Identifying these soon-to-be household names is difficult, but the payoff can be very rewarding. Let's take a look at two companies that I think are all-stars in the making. Both are growing quickly and have large market opportunities in front of them.
1. Dutch Bros
When you think about ubiquitous coffee chains, Dutch Bros (BROS -1.04%) is likely not the first name that comes to mind. Considering this up-and-coming coffee chain operates in only 16 states, there's a chance you've never heard of the company at all. According to its recent results, this may not be the case for long.
Dutch Bros is growing at a rapid clip and is prioritizing growing its company-owned shops. At the end of the third quarter of 2022, the company had 641 shops open. Of these stores, 58% were company-operated and the rest were franchise locations. At the end of the third quarter of 2023, the total number of locations had jumped to 794, good for an increase of 24% year over year. Additionally, the percentage of those stores that are company-operated jumped to 64%.
By the end of 2023, Dutch Bros expects to have opened at least 150 new shops, bringing the total to 821. This would be an increase of 22% over the end of 2022 and would be consistent with the growth seen over the last few years.
Data source: Dutch Bros.
As one might expect, the shop growth has led to strong revenue growth. In the third quarter of 2023, revenue increased by 33% year over year. What's more impressive is how the company also made improvements to profitability. Operating income increased by 378% and net income improved from $1.6 million in Q3 2022 to $13.4 million in Q3 2023.
Anyone can open a bunch of new locations and see revenue increase. What bodes well for the future of this business is that it's able to grow while improving its profitability. The company still burns cash (the money for new stores has to come from somewhere) and has had to tap the equity markets recently to fuel its growth. This is worth keeping an eye on and does present some risk to the investing thesis. That said, management believes that over time its cash generation will outpace its capital expenditures.
2. Dream Finders Homes
With a market cap of $2.4 billion, Dream Finders Homes (DFH 2.69%) is one of the smaller publicly traded homebuilders, but it has quickly made a name for itself in the regions where it builds. In 2012, just a few years after its founding, Dream Finders closed on just 261 homes. Fast forward to 2022 and the company closed on 6,878 homes. Dream Finders now builds homes in 219 different communities across eight states.
Dream Finders focuses on building first- and second-time homes, positioning it well to help close the housing gap in the United States. There is a housing shortage in the U.S., and it is especially acute for less expensive first-time homes. Additionally, the rise in interest rates is making it less likely families might move for fear of trading in a lower-interest-rate mortgage for a new one at a higher rate.
This is what could end up being fuel for Dream Finders' growth. In the absence of enough existing housing, the advantage tilts toward home builders. Dream Finders even subsidizes mortgages for its buyers, further incentivizing the purchase of their homes.
In the most recently reported quarter, there was ample evidence of this strategy paying off. In Q3 2023, homebuilding revenue increased by 14%, home closings grew by 17%, and new orders increased by 38%. Those are strong results considering the currently high interest rates, and they demonstrate the value that Dream Finders provides to potential homebuyers.
