The past year has been a solid one for many investors, with the benchmark S&P 500 index up by an impressive 20% as many companies recovered from the economic uncertainty of the post-pandemic period. While it is impossible to predict the future, 2024 looks poised to be another good year for stocks as macroeconomic challenges like inflation fade, and the Federal Reserve moves to loosen its hawkish monetary policy.
Let's explore why two dirt-cheap growth stocks, Luckin Coffee (LKNC.Y +3.49%) and Soho House (SHCO +0.00%), could make excellent additions to your investment portfolio next year and beyond.
Luckin Coffee
With shares up 17% year to date (to $29 per share), Luckin Coffee has performed well in 2023. Even though the Chinese coffee chain is still far from its pre-scandal highs, rapid growth, burgeoning profitability, and a rock-bottom valuation might make its future even brighter than its past.
In early 2020, Luckin Coffee stock reached its all-time high of $50 before crashing to single digits after its board discovered that previous management fabricated $300 million in 2019 sales. Since the crisis, Luckin has restructured its operations and leadership structure to maximize accountability and transparency. It has also reworked its growth strategy to focus on higher-margin expansion. So far, the results are impressive.
OTC: LKNC.Y
Key Data Points
Third-quarter earnings jumped 85% to $985.8 million based on a surge in new store openings and organic growth at existing locations. Most importantly, Luckin is deepening its international rollout in Singapore (where it opened an additional 11 stores in the quarter). The apparent international success suggests that Luckin's unique, contact-free business model can be popularized outside its home market of China.
Net income jumped 87% to $135.4 million. And with a trailing price-to-earnings (P/E) multiple of just 25.4, the stock is shockingly cheap, considering its growth rate. Luckin's discount may have something to do with continued trepidation after its previous management fraud. But it looks unlikely that lightning would strike twice, considering the increased scrutiny the company is under and its improved governance structure.
Soho House
Like Luckin Coffee, Soho House has also performed well in 2023, with its shares up 33% year to date. While the company still isn't profitable according to generally accepted accounting principles (GAAP), its valuation remains absurdly low compared to its long-term potential.
Founded in 1995 and made public through an IPO in 2021, Soho House operates a network of hospitality services centered around its namesake private membership club, where creative professionals pay an annual fee for access to exclusive hang-out spots located on prime real estate around the globe. These clubs contain hotels, food service, and entertainment, which comprise the company's "in-house" revenue stream.
Image source: Getty Images.
Third-quarter revenue increased 13% to $301 million based on an increase in membership fees and in-house sales. While this isn't a spectacular growth rate, Soho House needs to expand conservatively to maintain the cachet of its clubs and prevent overcrowding. The company's membership waitlist stands at a whopping 98,000, which suggests strong brand appeal and significant pent-up demand for its offerings.
While Soho House isn't profitable on a GAAP basis yet, adjusted EBITDA roughly doubled year over year to $42.1 million. This metric accounts for foreign currency fluctuations, which add back $31 million to earnings, and depreciation and amortization, which adds a further $24.5 million. Considering the international nature of Soho House's business, adjusted EBITDA seems to best illustrate the value created by its operations.
With a price-to-sales (P/S) ratio of just 1.11, shares are valued significantly cheaper than the S&P 500 average of 2.53.
Investing in the long term
When buying stocks, I like to focus on three things: valuation, growth, and profit potential. Over the long term, these three characteristics can help power long-term stock price appreciation and allow management to return value to shareholders via dividends or buybacks when the company finally matures. Luckin Coffee and Soho House combine these characteristics, making them fantastic buys in 2024 and beyond.
