When looking at the vast sea of public companies out there, a small percentage are inevitably better than others. Certain characteristics make some businesses stand out, and these are the ones I want to fill out a portfolio of high-quality stocks that will outperform over time.
With that in mind, here are my three favorite stocks right now.
Image source: Getty Images.
1. Chipotle Mexican Grill
Chipotle Mexican Grill (NYSE:CMG), the Tex-Mex fast-casual restaurant stock, reported another great quarter on Oct. 21. Same-store sales (or comps) jumped 15.1%, and this was in addition to an 8.3% increase in the prior-year period. This was the fifth-straight quarter of double-digit revenue growth, and the stock has more than quadrupled since hitting a pandemic low in March 2020.
What makes Chipotle so special is its scale. In an industry with a high failure rate, it has 2,892 locations serving up burritos, bowls, and tacos through a replicable model, and that is why the company is where it is today.
As most restaurants struggled to even survive over the past 18 or so months, Chipotle thrived, thanks in large part to its strong brand and digital ecosystem. More than 23 million people are rewards members, which gives the business an extremely valuable channel to connect with customers and drive higher levels of engagement. And digital sales made up 42.8% of total revenue for the company, up from just 18.3% in the same quarter of 2019.
And of the 97 new restaurants opened over the past two quarters, 81 were built with a drive-through, called a Chipotlane. This format allows the company to serve its customers in whatever way is most convenient for them, especially during a pandemic.
The business still has a long growth runway ahead of it if management can execute on its vision. "We remain confident in our key growth strategies and believe that over the longer term, they will allow us to have 6,000 restaurants in North America," CEO Brian Niccol mentioned on the second-quarter earnings call. As a fast-growing and popular restaurant operator enabled by its investments in technology, Chipotle is a favorite stock of mine.
2. Lululemon
With a $62 billion market capitalization as of this writing, Lululemon (NASDAQ:LULU) is a leading stock in the apparel industry. Shares have soared more than 700% over the past five years, a performance that has crushed the broad market and also bigger rivals like Nike and Adidas. In the most recent quarter, revenue and profit jumped 61% and 140%, respectively, from the prior-year period. The strong showing led management to raise full-year guidance.
Lululemon is a fantastic business because of its powerful brand. According to Piper Sandler's latest Taking Stock With Teens survey, Lululemon was the fifth most popular name in apparel, despite not having a specific business segment that targets teenagers. What started as a yoga outfitter for women has now morphed into a complete lifestyle brand. And as of the fiscal 2021 second quarter, men's revenue has grown at a compound annual rate of 31% over the past two years, exceeding the 26% growth for women.
The brand's strength is demonstrated by an exceptional gross margin of 58.1%. Lululemon sells its merchandise primarily through its website and 534 company-owned stores worldwide, which helps the business better manage inventory and avoid costly markdowns. In the second quarter, 41.2% of total revenue came from the e-commerce channel.
Like many other companies today, Lululemon is dealing with supply-chain problems. But by shifting production to other countries in Southeast Asia, prioritizing key holiday styles, and investing in extra air freight, the business should be able to navigate the headwind.
"I would say definitely view it as temporary in nature," CFO Meghan Frank said on the latest earnings call when asked by a Wall Street analyst about the need for increased capacity. No matter the severity of supply chain challenges, Lululemon is poised to do well.
3. O'Reilly Automotive
Although it operates in the boring automotive aftermarket-parts industry, O'Reilly Automotive (NASDAQ:ORLY) is flourishing. Comps in the most recent quarter rose 6.7% after increasing 16.9% in the same quarter of 2020.
Sales and net income have steadily grown over time, so it's no surprise the stock is up over 700% in the past decade. And the business now has 5,740 stores in the U.S. and 22 in Mexico.
The recession-proof nature of O'Reilly's business model is what's so attractive to investors. During the financial crisis, annual revenue soared 41.8% in 2008 and 35.5% in 2009, showcasing the company's all-weather appeal. But even in robust economic times, O'Reilly still shines. When unemployment is low and the economy is growing, consumers tend to drive more, increasing wear and tear on their vehicles. This supports demand for the company.
A gross margin of 52.3% and an operating margin of 21.7% in the third quarter, coupled with low capital expenditures, means O'Reilly is a cash cow. Management has historically returned excess cash to shareholders via share repurchases. Over the past 10 years, the outstanding share count has decreased by nearly half. Free cash flow for 2021 is expected to fall between $2.0 billion and $2.3 billion, leaving plenty of ammo for the company to continue buying back stock.
Because of O'Reilly's stable business and an attractive valuation of just 22 times forward earnings, it rounds out my list of favorite stocks.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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