Contrary to their name, growth stocks don’t always hit new highs. Stocks of companies with excellent growth prospects typically sell at expensive valuations, which will cause the share price to fall when the company experiences a hiccup in revenue or earnings growth. But as long as the business continues to grow, investors can take advantage of Wall Street’s focus on short-term results and position their money for a windfall down the road.
Here are two emerging powerhouse brands serving huge multi-billion-dollar markets that are surefire bets for the long term.
1. Celsius Holdings
Celsius Holdings (NASDAQ: CELH) is a rising star in the energy drink category — a market projected to reach $240 billion in annual sales by 2027, according to Statista. It has delivered robust growth over the last few years. But the stock is now down 61% from its previous peak, which sets up a great buying opportunity.
The stock’s collapse this year might look strange, since the company continues to report strong growth. Revenue grew 23% year over year in the second quarter, but this is well off the pace of the triple-digit growth it was reporting just a year ago.
The weak consumer spending environment is catching up to Celsius, but most noteworthy is that the company’s Q2 sales increase contributed nearly half the growth of the entire energy drink category. As that performance indicates, Celsius’ focus on making energy drinks with no artificial flavors and zero sugar is resonating with customers.
The stock was recently trading at a forward price-to-earnings ratio of 36, down from more than 80 earlier this year. The share price may still hit new lows in the near term, but it will bottom out and resume tracking the growth of the business over the long term.
Celsius is seeing green shoots in e-commerce, where sales through Amazon were up 41% year over year, making Celsius the No. 1 energy drink brand during Amazon’s Prime Day in July.
Another positive sign for investors is that Celsius continues to leverage costs to grow profits at high rates. Earnings per share were up 77% in Q2 year over year. If Celsius continues to grow earnings at high double-digit rates, the stock could be trading significantly higher within a few years.
2. Chewy
People love their pets, and Chewy (NYSE: CHWY) is emerging as the Amazon of online pet stores. The pet care industry is a $144 billion market that Chewy is going after. It’s a massive opportunity for a company with just over $11 billion in annual sales.
The stock is down 80% from its previous high for the same reason Celsius is — slowing growth. Chewy’s annual sales growth decelerated from 25% in fiscal 2021 to just 7% over the last year.
Lower growth brought the stock’s valuation down to more reasonable levels that should set the stage for a major rebound. The price-to-sales ratio has fallen 81%, from around 4.5 three years ago to 0.9.
At these levels, the stock looks like a bargain. The share price rebounded 65% off its recent low, and may have room to run as Chewy keeps sales growth stable in the high single-digit range and begins to build greater profitability.
Chewy continues to invest in areas that are expanding margins. Its adjusted earnings before taxes, interest, depreciation, and amortization (EBITDA) jumped 47% year over year in fiscal Q1 to $163 million. This reflects Chewy’s investment in margin-accretive product lines like health services and sponsored ads.
It is currently testing Chewy Plus, a new membership program that offers free shipping and other benefits. It’s a move to lock in loyal customers with value-enhancing services that boost sales — and, importantly, profits.
With these initiatives bearing fruit ahead of a huge opportunity, the stock is a great buy at these lower share prices and should deliver excellent returns in the coming years.
Should you invest $1,000 in Celsius right now?
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Celsius, and Chewy. The Motley Fool has a disclosure policy.
2 Growth Stocks Down Over 60% to Buy Right Now was originally published by The Motley Fool
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