One of the best ways to build lasting wealth is by investing in growing companies and holding onto those shares for many years. While it's difficult to know how a stock will perform in any given year, identifying companies with great long-term prospects that are also showing improving financial results in the near term can boost your odds of finding timely buys.
Three Motley Fool contributors were recently asked to select three stocks that they think could outperform the major indexes this year. Here's why they chose e.l.f. Beauty (ELF -3.62%), Revolve Group (RVLV 2.96%), and Sweetgreen (SG 1.92%).
e.l.f. could become the top beauty brand in the world one day
John Ballard (e.l.f. Beauty): Shares of this cosmetics brand have exploded, climbing 500% over the last three years. E.l.f. Beauty reported accelerating sales growth last year, driven by an effective distribution strategy with major retailers like Target. But the shares recently dipped, which makes this a great time to buy, as the company is in the early stages of expanding globally.
Sales grew an impressive 85% year over year in its most recently reported quarter. It is now the No. 3 brand in the U.S. cosmetics category.
Importantly, e.l.f. Beauty's success in expanding into areas such as skin care shows a brand that is gaining tremendous consumer awareness. These results stem from its focus on offering quality products at value prices and topping it off with great marketing.
The company is also showing massive international growth potential. Over the last five years, its international sales have grown at a 37% annualized rate, and that growth rate accelerated to 113% last year.
The stock's valuation is expensive, with a price-to-earnings ratio of 74.5, but I believe it's worth paying up for. Indeed, its forward P/E ratio of 48 looks fairly reasonable based on Wall Street's long-term earnings growth forecast of 35% per year. Investors should expect e.l.f. Beauty stock to outperform the major indexes in 2024 and beyond.
The future of fashion
Jennifer Saibil (Revolve Group): Like pretty much every sector, the apparel industry is moving toward greater use of digital channels and artificial intelligence (AI), and Revolve Group is leading the change. Revolve runs two luxury women's wear websites, Revolve and FWRD, and its differentiated model -- driven by AI -- is resonating with its loyal and growing customer base.
Revolve uses AI throughout its business for merchandise selection, but it goes deeper than that. It has been in the fashion business for 20 years, and it has a deep trove of data that it uses to design and produce the styles its customers want. Since it's all online, it's not saddled with the costs or timeframe of getting its apparel into physical stores -- it can put its designs online and start getting them out to shoppers as soon as they're manufactured. Last year, it created the first-ever AI billboard campaign, and it uses AI in marketing, events, and operations.
Beyond its AI efforts, it has an innovative marketing model. It works through celebrity and influencer affiliate marketing, and it has design collaborations and capsule collections with its celebrity partners. It reaches its millennial and Gen Z target customers where they are online, and it hosts physical events and parties to deepen its relationships.
In general, Revolve's strategy of purveying luxury goods to mass-market consumers has led to high sales growth. However, these core customers are pulling back on their discretionary spending right now. Revolve's revenue declined 1% year over year in the fourth quarter, and net income was down 56%.
The customer metrics, though, tell another side of the story. Active customers increased by 9% year over year, and total orders placed increased by 5%. Average order value decreased by 2%, which makes sense -- shoppers still love Revolve, but they're spending less.
That's a great indication of Revolve's potential when the economy shapes up. Its marketing strategy is working, and Revolve is well-positioned to climb higher as it provides its customers with products they love.
A fast-casual star with a twist
Jeremy Bowman (Sweetgreen): Sweetgreen has had a rough time since its initial public offering, but investors finally seem to be recognizing the opportunity in the fast-casual restaurant disruptor.
The stock has already doubled this year following a strong fourth-quarter earnings report that featured 29% revenue growth to $153 million and an average unit volume of $2.9 million, which is comparable to Chipotle Mexican Grill, the leader in the fast-casual segment.
Based on its concept alone, Sweetgreen is a promising growth story. It's pioneering a new category as a fast-casual salad chain, and its high average unit volume shows clearly that the demand is there for its offerings.
However, there's another reason why Sweetgreen could keep climbing this year and run circles around the stock market.
The company has begun rolling out a technology it calls "Infinite Kitchen" -- essentially, a robotic salad assembly platform that speeds up order prep and throughput, and cuts down on labor expenses.
After opening two restaurants with its robot kitchens, Sweetgreen plans to open seven to nine locations this year and retrofit two to four others. That's a significant acceleration of the platform.
If it delivers the kind of results the company has projected, it could be a game-changer for Sweetgreen, which would likely be a much more valuable company if it could drive profitability in addition to revenue growth and high average unit volumes.
It may take a few quarters, but investors seem prepared to reward the stock for good news based on its jump after the fourth-quarter earnings report, and Sweetgreen stock is still down 57% from its post-IPO peak.
