Finding companies you can buy and hold over the very long term is the key to successful investing. Not only does trading in and out of stocks typically diminish returns, but it also interrupts the compounding that leads to positive long-term results. The trick is to identify those companies with strong-enough fundamentals to want to hold forever.
Here are two businesses that have put up impressive results and have bright futures. They're also both trading for less than $100, meaning investors with limited funds can consider these stocks for their portfolios.
1. Dutch Bros
Dutch Bros (BROS -1.04%) might be the fastest-growing coffee company you've never heard of before. Operating in 16 states, it has been rapidly adding to its store count in order to gain market share of this important part of the consumer economy.
The pace of Dutch Bros coffee shop growth has been impressive. The 794 shops that the company operated at the end of Q3 2023 grew by 24% year over year. This has helped contribute to revenue growth of 33% over the same time frame.
Interestingly, Dutch Bros has been able to open new shops while also improving the bottom line of the business. Net income in Q3 2023 grew to $13 million, improving from just $2 million in Q3 2022. This has been the trend over the last few years. In the third quarter of 2021, the company posted a net loss of $117 million.
Part of this is because new stores have a quick progression to profitability after opening. On average, a new shop will have a gross margin of negative 29% in the quarter after it opens. However, that improves to a positive gross margin of 26% within four quarters. This is why the company can open stores rapidly and not see a negative impact on the bottom line.
It's also worth noting that the company's 33% revenue growth was not entirely driven by new store openings. Same-shop sales grew by 4% in Q3, demonstrating that the existing stores are also driving revenue growth.
Dutch Bros faces stiff competition considering how many coffee shops there are, from small mom-and-pop businesses to large-cap public companies. However, the rapid growth and steady improvement on the bottom line suggests Dutch Bros has something special going on.
2. Etsy
E-commerce marketplace Etsy (ETSY 0.34%) is one of the companies that was most drastically impacted by the COVID-19 pandemic. Driven by the worldwide scramble to find masks in the early days of the pandemic, Etsy saw its revenue grow in the triple digits for about a year. That revenue growth, combined with the general market sentiment, sent Etsy's stock skyrocketing.
Unfortunately for the company and its shareholders, that growth represented a pull-forward and not a sustainable shift in the business, and the company has been trying to get back on even footing ever since. Most recently, Etsy announced layoffs of approximately 11% of its workforce to right-size the business.
All this volatility has translated to the stock, which is now trading about 72% lower than its 2021 high. While that all sounds like bad news, the business is still posting some positive results. Revenue growth in Q3 2023 was 7%, and while that is slower than where it has been historically, the company remains profitable, and it generated over $200 million in free cash flow in the quarter.
The metrics worth watching are active sellers and active buyers. Etsy needs these to increase steadily for the business to continue to grow over time. In Q3, active sellers increased by 19%, and active buyers grew by 3%. Q3 was the third consecutive quarter where growth in these metrics accelerated. Etsy wants to see buyers and sellers grow more rapidly, and this is certainly what investors should pay attention to moving forward.
Etsy shares trade for about 4 times sales and 17 times free cash flow. Both of these multiples are lower than the company's historical averages. The growth may not be what it was in 2021, but neither is the valuation. For a profitable, cash-generative business with a unique niche in the marketplace, I think today's valuation offers a compelling risk/reward for investors.
