Buying the Pullback on these High Quality Stocks
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Buying companies on price weakness can be a very profitable long term strategy, but not every stock is an opportunity only because its price has fallen. Investors need to be certain about the company's quality and the long term value of its business before deciding to be opportunistic and capitalize on a recent price fall.
One unequivocal sign of a strong competitive advantage is a rock solid brand standing behind the company's products, and Nike (NYSE: NKE) is an undisputed leader in the global sports footwear and apparel business. The company has built its differentiated brand through decades of memorable marketing campaigns and sponsoring the world's most renowned athletes.
Shares of Nike where close to reaching an all-time high of $115 a couple of months ago, and they are near $93 after rebounding from a low of $85 at the end of June. The reason behind the decline was a disappointing earnings report due to cost increases and the economic slowdown in Europe. Nike may need some time to overcome these issues, but nothing has changed at the company from a fundamental point of view, so this may be a convenient time to consider adding shares of this high quality business at a discounted price.
Shares of Chipotle Mexican Grill (NYSE: CMG) took a big hit last Friday, falling by more than 21.5% as investors couldn't wait to get out of this fast-casual Mexican food restaurant chain. Such a dramatic fall doesn't seem justified by the company's earnings report, Chipotle reported an increase of 60% in earnings per share, and comparable store sales were up by an 8% year over year. This is an excellent company delivering outstanding performance, but its shares had gotten quite expensive, which seems like the main reason for the decline in spite of the solid numbers.
Trading at a P/E ratio of more than 54 before the fall, Chipotle was much more expensive than an industry a leader like Starbucks (NASDAQ: SBUX) which trades at 30 times earnings. Chipotle is younger than Starbucks, and is still hasn't even started its international expansion, so it has more exciting growth prospects ahead of it. But on the other hand, Starbucks is a proven business with presence all over the world, which has a wonderful brand power and still plenty of opportunities coming from emerging markets and product innovation.
Panera Bread (NASDAQ: PNRA) can be considered a more similar alternative to Chipotle than Starbucks, it’s still in its first growth stages with big opportunities for international expansion ahead of it. Panera also shares with Chipotle its commitment to high quality food and a differentiated service, which commands higher prices and generates above average profitability for investors. Much in line with Starbucks, shares of Panera are trading at a P/E of 30.
Shares of Chipotle´s didn´t fall because the company is losing steam; a much more likely explanation is the excessive valuation its shares had achieved on the back of the company´s strong performance and interesting perspectives. Now that Chipotle is approaching a more reasonable valuation in the area of a P/E near 38, it may be a good time to take a look at this high quality burrito maker.
Earnings season usually brings some extra volatility to the stock market, but that also means interesting buying opportunities can emerge in the best companies around when their prices suffer temporary setbacks. Both Nike and Chipotle have what is needed to recover over the following years and reward investors for they patience and discipline.
acardenal has no positions in the stocks mentioned above. The Motley Fool owns shares of Chipotle Mexican Grill, Panera Bread, and Starbucks. Motley Fool newsletter services recommend Chipotle Mexican Grill, Nike, Panera Bread, and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.