A few days prior, an article was published outlining “My Top 3 Picks for 2024.” These picks were carefully selected to leverage the potential growth opportunities, influenced by several factors including the presidential election, surging AI investments, and declining mortgage rates.
- Alphabet (GOOG) Blended P/E: 24.1x, 10Y EPS growth: 17.5%, Annual Return Potential: 17%
- Nvidia (NVDA) Blended P/E: 41.3x, 15Y EPS growth: 39.5%, Annual Return Potential: 31%
- Lowe’s (LOW) Blended P/E: 16.2x, 15Y EPS growth: 16.5%, Annual Return Potential: 14%
The majority of the previously discussed stocks fit within the growth stock category. However, additional picks with a more aggressive growth profile will be introduced in this article. Though not core holdings, these selections hold substantial potential, ranging from 1% to 3% exposure in the portfolio. This choice reflects the confidence placed in their ability to deliver outstanding performance in 2024.
Although the focus is often on dividend growth stocks in writings, it’s essential to acknowledge the presence of growth stocks without distribution, strategically chosen to invigorate the portfolio.
The advantage of growth stocks without distribution is their ability to maximize the potential of compound interest by reinvesting profits to foster business growth. Despite their higher volatility, these stocks carry the allure of potentially higher returns.
With that said, three growth stock picks will be showcased for heavy investment throughout 2024, aligning with the investment style and portfolio, whilst recognizing the existence of potentially more attractive or riskier opportunities.
Chipotle Mexican Grill, Inc. (CMG)
If you’re not familiar, Chipotle Mexican Grill is a popular fast-casual restaurant chain renowned for its emphasis on using fresh, high-quality ingredients in crafting Mexican-inspired dishes.
Yes, it might sound surprising, but I’ve chosen a restaurant chain as a potential growth stock.
The rationale behind this choice is straightforward – Chipotle transcends the traditional image of a restaurant chain by focusing on the automation of kitchen processes and embracing robotic innovation in gastronomy.
Traditionally, labor costs constitute a significant chunk of expenses for restaurant businesses, often reaching up to 34% of sales. The impact of this became even more apparent post-COVID-19, with many restaurants scaling down operations due to a shortage of available labor. Chipotle stood up to the challenge.
Initially, Chipotle introduced a robot for crafting tortilla chips, followed by another for assisting in guacamole preparation. The latest endeavor involves testing a robotic chef tasked with creating salads and bowls at the Chipotle Cultivate Center innovation hub in Irvine, California.
Automated assistance in preparing bowls and salads becomes particularly crucial since these dishes constitute approximately 65% of all Chipotle digital orders.
Chipotle’s ability to adapt and innovate is underscored by its Q3 earnings report, revealing an improvement in demand trends and rising profit margins amidst a challenging economic environment for consumer spending.
Drawing more diners doesn’t seem to be an issue for Chipotle, evident in a 5% increase in comparable-store sales during the Q3 period that extended through late September. Management attributes this success to enhanced hiring and training practices, superior food quality, and faster service.
In the face of economic uncertainties, Chipotle’s CEO, Brian Niccol, confidently states that the company’s value proposition is stronger than ever.
The enhanced value proposition has translated into increased customer traffic, a sought-after achievement that has proven challenging for many restaurant peers in recent times. However, McDonald’s (MCD), with its focus on value, is outpacing others, experiencing a faster expansion with an 8% increase in comparable-store sales in the US market this past quarter.
It’s worth noting that Chipotle operates differently from McDonald’s and Domino’s Pizza (DPZ), employing a non-franchised operating model. Consequently, its profit margins don’t reach the same heights.
Chipotle’s restaurant-level operating profit margin saw improvement, climbing from 25% to 26% of sales compared to a year ago. The overall profitability also increased to a robust 16% of sales from 15%. This positive trend is reflected in a noteworthy 20% surge in adjusted earnings for the quarter.
Investors will recognize Chipotle’s superiority in gastronomy, and the stock is by no means cheap. Since 2007, the stock has continuously traded at an average blended P/E of 52.3x, which seems very high for a restaurant chain.
The valuation has stretched even further in the last 10 years to an average blended P/E of 62.8x.
Since 2007, Chipotle has grown its EPS at a rate of 23% annually, and this trend is expected to continue well into the future.
