From e-commerce to travel, these leading brands will prosper in a growing economy.
It's safe to say a new bull market is underway. The S&P 500 index is up 25% over the last 12 months and hit new highs to start the year. Because bull markets usually last a lot longer than bear markets, investing in the right growth stocks could pay off over the next five years.
The most important thing is to invest in solid companies that are almost certain to keep growing for many years due to a competitive advantage or industry tailwind.
If you have $1,000 sitting around and don't need it for more important things like paying off high-interest debt, here's why Amazon (AMZN -0.01%), Lululemon Athletica (LULU -7.23%), and Hyatt Hotels (H -0.19%) are great stocks to buy.
1. Amazon
Amazon's business is gaining momentum. Revenue growth from its online stores improved in each quarter last year. Since bottoming out, the stock has rallied 84% over the past year, but there is much more upside in store for shareholders as management focuses on reducing costs and boosting the company's profits.
Amazon spent tens of billions of dollars over the last 20 years building a massive footprint of fulfillment infrastructure for its online retail business. Management says it built a transportation network the size of UPS in just 18 months to handle the surge of orders during the pandemic. While this cost a lot of money and sent the company's profits down, it is now starting to reap the benefits of that investment.
As the old saying goes, stocks follow earnings over the long term. Amazon's operating income (earnings before interest and taxes) skyrocketed 383% year over year in the fourth quarter to more than $13 billion. Head count reductions and slow hiring over the last 12 months have contributed to increased profitability, but management seems eager to trim costs in even more ways.
On the latest earnings call this month, CEO Andy Jassy said executives see "meaningful upside" to lowering the costs to serve customers. This involves getting more efficient in how it locates inventory to speed up delivery, in addition to seeing some of the inflationary costs that hurt many companies in 2022 start to come down.
Street consensus estimates show Amazon growing earnings per share at an annualized rate of 24%. This means if the stock is still trading at a forward price-to-earnings (P/E) ratio of 41 by 2030, investors could see their investment triple in value. Even if the stock's valuation comes down closer to the market average of around 25, that would still leave enough upside to potentially double the value of the shares.
2. Lululemon Athletica
Lululemon's growth over the last decade has been stellar, primarily reflecting the resilience of the athletic apparel market.
The company's annual revenue has more than doubled from pre-pandemic levels, and it continues to grow in line with that trend. Revenue jumped 19% year over year in the quarter ending in October. Increasing demand for athletic wear, which has been on an upward trajectory for decades, and international expansion are the biggest tailwinds supporting Lululemon's rising stock price.
The athletic wear industry is valued at over $200 billion, according to Statista, and it continues to expand. Lululemon is benefiting from its premium brand positioning and sophisticated online shopping experience.
Lululemon is constantly refreshing its assortment to keep demand up, but it also continues to benefit from core styles that have become perennial best-sellers, such as the men's ABC pant and the women's Align. The brand is still in the early innings of growth, as international revenue soared an impressive 49% year over year last quarter.
Analysts project long-term earnings growth of 16% on an annualized basis. Assuming the company meets those expectations, which are consistent with management's goals, and the stock continues to trade at a forward P/E of 31 -- within its past trading range -- investors can expect to double their money by 2030.
3. Hyatt Hotels
Hyatt is the leading brand in the luxury resort market that could deliver excellent returns for shareholders as travel demand continues to increase. In fact, the travel industry is expected to grow to over $1 trillion by 2027, according to Statista.
The key to appreciating Hyatt as a wonderful investment lies in how it generates revenue. While the hotel-chain gets some sales from owned hotels and room rentals, it primarily makes money from fee-based revenue, licensing, and other services. Hyatt sells third-party owners and franchisees the right to use Hyatt's intellectual property. This strategy lends itself to a profitable business that, when combined with a growing industry tailwind, drives shareholder returns.
Hyatt's free cash flow has more than doubled since 2017, and management continues to redirect those resources into expanding the number of rooms available in order to increase revenue. It has led the industry in net room growth over the last six years, and management sees more opportunities to enter new markets to expand further.
One opportunity is the Asia-Pacific region. Revenue-generating fees in this region soared 51% year over year in the fourth quarter. Hyatt also announced an agreement with the Hangzhou Trade and Tourism Group to develop over 60 hotels in China.
Analysts expect Hyatt to increase earnings by 10% on an annualized basis. Management is making moves to boost the percentage of profits coming from high-margin fees, including selling owned hotels to reinvest in more profitable areas of the company. These decisions should continue to drive attractive returns for investors.
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 and Lululemon Athletica. The Motley Fool recommends Hyatt Hotels and United Parcel Service. The Motley Fool has a disclosure policy.
