Are Growth Stocks Dead?
Jul 23rd 2012 9:38AM
Updated Jul 23rd 2012 9:46AM
Shares of Chipotle Mexican Grill (NYS: CMG) dropped over 20% Friday after the restaurant chain posted disappointing top-line growth in its second-quarter report. Investors got spooked that the burrito-rollers may not be growing as fast as they'd hoped, and with a P/E of over 50 before the report came out, the stock took a beating. But Chipotle isn't the only one feeling the pain.
Badly burned burrito
Though Chipotle beat earnings estimates handily, the market needs to see strong sales growth in order to support continued EPS increases. Revenue grew by just 20.9% as opposed to estimates of 23.6%, and its same-store sales increase of 8% was also lower than expected.
Investors have become wary of growth traps after the collapse of Netflix and Green Mountain Coffee Roasters (NAS: GMCR) the past year. Investors tend to run once the story starts to smell fishy. But Netflix and Green Mountain had unique problems. The video entertainment specialist's DVD-by-mail business model was disrupted, and it was forced to move into video streaming, exacerbating the situation with a number of customer relations errors along the way. Investors fled from Green Mountain because its K-cup patents are about to expire, meaning it will no longer have a monopoly on its most valuable product.
Nothing in particular seems to be ailing the other growth stocks above, though they're all well off recent highs.
lululemon shares seem to be stuck in a downward-facing dog recently. They've fallen about 30% since all-time highs at the beginning of May, and the yoga clothier faced a sell-off of its own after its guidance last quarter came in below the experts'. The company said it expected comps in the low double digits in Q2 after they had jumped 25% in the first quarter. The apparel seller is facing rising competition from the likes of Gap copycat Athleta, but with under 200 stores, lululemon still has plenty of room to expand, as well as international opportunities awaiting. With a P/E down to 41 after the pullback and EPS growth at 39% in its most recent quarter, this looks a good buy at current prices.
Monster Beverage looks like it's been hiding under the bed recently as shares have fallen more than 10% in just two days last week. Even after the drop, shares are still up 30% over the year, and some have called this a good time to take profits. Monster faces competition from all corners of the market, but the energy drink segment has been one of the fastest growers in the beverage industry. Net income rose 38% in its latest quarter, in line with its P/E ratio of 38. Observers may question how long the energy drink category will continue to grow at this pace, but with sales outside of the U.S. at only 19% of revenues, it looks like Monster has plenty of room to add sales overseas. Its distribution partnership with Coca-Cola will only help. Shares look appropriately priced right now.
As another fast-casual restaurant chain, Panera bears the most in common with Chipotle, and its stock should be most likely to move with the burrito chain. Shares of Panera are down about 12% since highs in March, riding the general market trend. Net income increased 28% at Panera restaurants in the first quarter, corresponding to its P/E of 29.8. About half of Panera restaurants are franchised, unlike Chipotle, which is entirely company-owned. With over 1,500 restaurants already open, and stores requiring a larger footprint than Chipotle, there is probably less potential for expansion for Panera than for the burrito chain, which just passed 1,300 stores this quarter. Panera, however, is priced less than Chipotle shares and with less than half the market value.
Whole Foods and Starbucks also joined in the bloodbath, losing 7% and 4%, respectively.
Chipotle management cited the slowdown in the economy one possible reason for the disappointing sales, which took a dive in May at the same time the stock market dipped. Missing estimates will hurt highfliers like the stocks above, but they shouldn't be punished for regular downturns in the business cycle. In Q2 of 2009, for example, Chipotle showed same-store sales growth of just 1.7%. lululemon's Q2 2009 comps actually dropped by 2%. Those two stocks, as well as Monster and Panera, have wildly outperformed the market since the recession.
For a verdict on Chipotle, investors will have to wait and see if sales follow the lower trend over the rest of the year, and how much of that is to blame on the overall economy.
Investors should recognize that the rest of the above stocks could take a dive with the slowdown, as the market gets nervous about them maintaining their high trajectory. That's not to say that these are bad investments, just that they tend to ride the business cycles harder than most stocks. As we saw with the recession, I expect a recovery will boost the stocks again. For the long-term investor, these stories are still intact.
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The article Are Growth Stocks Dead? originally appeared on Fool.com.Fool contributor Jeremy Bowman owns shares of Chipotle Mexican Grill. The Motley Fool owns shares of Green Mountain Coffee Roasters, Chipotle Mexican Grill, Netflix, Starbucks, Panera Bread, and lululemon athletica. Motley Fool newsletter services have recommended buying shares of Green Mountain Coffee Roasters, Chipotle Mexican Grill, Panera Bread, Netflix, lululemon athletica, Monster Beverage, and Starbucks. Motley Fool newsletter services have recommended creating a bear put spread position in Chipotle Mexican Grill. Motley Fool newsletter services have recommended creating a lurking gator position in Green Mountain Coffee Roasters. Motley Fool newsletter services have recommended writing covered calls on Starbucks. The Motley Fool has a disclosure policy.We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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