While technology stocks seem to garner much of investors' attention nowadays, there are some solid opportunities in the consumer space that investors should consider picking up while the stocks are on sale.
Let's look at three growth stocks well off their highs that investors can look to buy right now. They all have easy-to-understand businesses and growth drivers ahead.
1. e.l.f Beauty
Despite strong growth this year, shares of e.l.f Beauty(NYSE: ELF) are down about 50% from their highs, representing a great buying opportunity. The company has done a tremendous job taking market share in the mass cosmetic space over the years and still has a lot of growth opportunities in front of it.
The company uses a fast-follower strategy, replicating popular prestige brand products and offering them at a fraction of the cost. This, along with the use of influencers and social media marketing, has helped the brand resonate with the younger female demographic. The company has increased its market share for color cosmetics for 22 consecutive quarters and is now the No. 2 mass brand in the U.S., with a 12.3% market share as of the second quarter.
While e.l.f. still has room to gain shelf space and grow in the U.S., the company has two huge opportunities ahead. The first is with skincare, a space in which the company is still relatively new. However, it should have the opportunity to replicate its color cosmetics playbook to make strong gains in this adjacent category.
Image source: Getty Images.
At the same time, e.l.f. also faces a huge international expansion opportunity. The company has established itself as a mass market leader in several countries, including Italy and the Netherlands. However, with just 16% of its Q2 sales coming from international markets, compared to more than 70% for many of its peers, it has a long runway of growth.
Trading at a forward price-to-earnings ratio (P/E) of 26 times fiscal year 2026 analyst estimates and a price/earnings-to-growth ratio (PEG ratio) of only 0.6 times, this is a great time to scoop up the stock while it is on sale. A PEG under 1 times is usually considered undervalued, while growth stocks will often command multiples much higher than 1.
2. Dutch Bros
Dutch Bros (NYSE: BROS) is a fast-growing coffee-house operator that has been seeing solid same-store sales, but its biggest opportunity is its regional-to-national expansion off a small store base.
The company put up strong results in Q2 (ended June 30), with 30% revenue growth and 4.1% same-store sales growth. However, the stock got hammered after the company said new store openings would come in at the low end of its guidance as it has refined its real estate strategy. This led to some locations in its pipeline no longer fitting its real estate location criteria.
However, the company's long-term expansion appears to remain on track. The company ended Q2 with 912 locations (612 company-owned), which is a fraction of the over 15,000 stores that rival Starbucks(NASDAQ: SBUX) operates in the U.S.
In addition, its stores tend to be on the smaller side and rely on drive-throughs, which makes them inexpensive to build. However, its stores still have solid throughput with average unit volumes (AUVs) of nearly $2 million per location, slightly ahead of Starbucks. This is despite Dutch Bros just beginning to introduce mobile orders, which should increase sales growth.
Despite having a much longer store opening runway of growth, the company trades at a very similar forward price-to-sales multiple as Starbucks, making a great stock to pick up while it is on sale.
BROS PS Ratio (Forward 1y) data by YCharts. PS Ratio = price-to-sales ratio.
3. Chewy
Chewy(NYSE: CHWY) stock has been on a rollercoaster ride this year, down about 25% from the highs it hit earlier this year.
The e-commerce company has one of the most attractive business models in the retail space, with more than 78% of its sales last quarter coming from auto-ship customers. Chewy has a strong recurring business model, as about 85% of its sales last year were from non-discretionary items, such as pet food and pet health products.
While sales growth slowed this year compared to strong growth during the pandemic, the company expects trends to return to normal next year. This is a nice near-term opportunity, although gross margin expansion is its biggest opportunity moving forward.
The company is looking to expand gross margins in several ways. These include more private label offerings, which carry about 700 basis points in better margins than selling pet food from national brands, and sponsored ads.
However, the largest opportunity is in expanding its pet pharmacy business. The company has approximately 20 million active customers, but only around 20% use its pharmacy services. With gross margins up to 1,000 basis points higher than its retail business, this is a huge revenue and profit opportunity for the company moving forward.
With a lot of operating leverage in its business and an attractive recurring business model that sells largely non-discretionary items, the stock is attractively valued at a forward P/E of under 23 times next year's analyst estimates.
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Geoffrey Seiler has positions in Chewy and e.l.f. Beauty. The Motley Fool has positions in and recommends Chewy, Starbucks, and e.l.f. Beauty. The Motley Fool recommends Dutch Bros. The Motley Fool has a disclosure policy.
