Over the long term, the most reliable way to build wealth in the stock market is to buy an index fund and hold on to it. This strategy would have delivered an average return of around 10% over the last 100 years. However, if you want to actually beat the market, you will need to find fast-growing companies that Wall Street has yet to fully discover.
Let's explore some reasons why the Chinese coffee chain Luckin Coffee (LKNCY 2.63%) and packaged food specialist Mama's Creations (MAMA 12.83%) fit the bill and could be poised to outperform.
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Luckin Coffee
If you haven't been keeping up to date, you might be familiar with Luckin Coffee for all the wrong reasons. In late 2019, the company's former leadership fabricated $311 million in sales in a fraud case that eventually led to fines and a delisting from the Nasdaq. However, Luckin has bounced back stronger than ever, giving investors the chance to bet on a fantastic growth opportunity at a substantial discount to prior highs.
Fourth quarter revenue jumped 32.9% year over year to $1.82 billion, driven mostly by new store openings in China. The company's edge comes from its low prices (through coupons), online ordering, and streamlined, cashier-free experience. And it is expanding this formula across other countries like Singapore, Malaysia, and the U.S.
OTC: LKNCY
Key Data Points
At $32 per share, Luckin's stock is 36% cheaper than its all-time high of $50 reached in early 2020 despite its strong growth and global expansion. This persistent discount may have something to do with the fact that shares are no longer listed on a major U.S. exchange, which may be putting them out of reach for many investors and hurting credibility.
The good news is that CEO Jinyi Guo plans to return Luckin to the Nasdaq. And although no specific time frame is mentioned, this move could unlock significant value. Multibagger returns are definitely possible because shares trade at a reasonable forward price-to-earnings (P/E) multiple of 24, which is much lower than U.S.-listed rival Starbucks, which trades for a forward P/E of 41.
Mama's Creations
With shares up by an eyewatering 419% over the last five years, Mama's Creations demonstrates what growth stock investing is all about. The company gives investors the opportunity to get in on the ground floor of a rapidly scaling business. And the rally still has room to run.
Mama's Creations is an Italian-inspired packaged food creator known for its meatballs and deli meats, which are supplied to big-box retailers, including Walmart and Costco Wholesale. These mainstream distribution partners speak to the quality of its products. And this particular niche in the food industry is attracting more consumer attention. Years of above-average inflation have people looking to save money by purchasing fresh packaged foods instead of eating out at traditional restaurants.
NASDAQ: MAMA
Key Data Points
The company has all the ingredients needed to succeed, and management aims to rapidly scale up through acquisitions. Last year, Mama's Creations purchased the ready-to-eat meal manufacturer Crown for $17.5 million in a move that will give it a wider product portfolio while also allowing it to quickly accumulate food processing machinery.
If there is a clear downside to Mama's Creations' stock, it would be its valuation. With a forward price-to-earnings (P/E) multiple of 55, shares are quite a bit more expensive than the S&P 500 average of 20. But with third-quarter sales jumping 50% to $47.3 million, the company looks capable of growing into its valuation.
Which stock is better for you?
Luckin Coffee and Mama's Creations are both great picks because of their healthy top-line growth and profitability -- which is extremely important in a market full of speculative, money-losing companies. But between the two, Luckin Coffee looks like the stronger pick right now.
While Mama's Creations has dramatically outperformed Luckin over the last 12 months, the Chinese coffee shop's valuation leaves more room for upside while also making it seem a little safer to buy. Furthermore, management's plan to relist the stock on U.S. equity markets could unlock significant value. And shares probably won't stay this cheap for long.
