3 Roughed Up Growth Stocks You Need to Know About

Josh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In any market, many short-term hiccups are magnified and scrutinized (particularly during earnings season), leaving behind a vast array of quality businesses that have been oversold.   Oftentimes, what remains is an opportunity to turn a short-term sell off into a long-term buy and hold.  This is especially true in the volatile world of growth stocks, as valuations tend to fly high until the simplest of bad news shatters their stock price in a matter of minutes.

It is our job as investors to look at these sell offs and determine which ones represent a buying opportunity thanks to the market's overreaction.  Today we will take a look at priceline.com ) and Lululemon Athletica (NASDAQ: LULU), as the market has sent each of them downwards to the tune of 13%.  We will also take a look at Chipotle Mexican Grill ), which has seen its stock drop over 40% on the heels of two disappointing earnings results and one David Einhorn

The Valuations

<table><tbody><tr><td><strong>Company</strong></td><td><strong>P/E</strong></td><td><strong><span><span>FP</span></span>/E</strong></td><td><strong>P/CF</strong></td><td><p><strong>PEG</strong></p><p><strong>5 Yr.</strong></p></td><td><strong>Cash/Debt</strong></td><td><p><strong>Profit</strong></p><p><strong>Margin</strong></p></td><td><p><strong>1 Year</strong></p><p><strong>Rev. Growth</strong></p></td><td><p><strong>5 Year</strong></p><p><strong>Rev. Growth</strong></p></td><td><p><strong>1 Year</strong></p><p><strong><span><span>EPS</span></span> Growth</strong></p></td><td><p><strong>5 Year</strong></p><p><strong><span><span>EPS</span></span> Growth</strong></p></td></tr><tr><td><strong><span><span>Chipotle</span></span></strong></td><td>28.9</td><td>23.8</td><td>22</td><td>1.32</td><td>573M/3.6M</td><td>10.4%</td><td>23.6%</td><td>18.8%</td><td>20.1%</td><td>34.1%</td></tr><tr><td><strong><span><span>priceline</span></span>.com</strong></td><td>24.0</td><td>15.9</td><td>21</td><td>0.88</td><td>3.94B/1.45B</td><td>25.6%</td><td>41.2%</td><td>28.7%</td><td>100.2%</td><td>56.3%</td></tr><tr><td><strong><span><span>Lululemon</span></span></strong></td><td>44.8</td><td>29.8</td><td>39</td><td>1.38</td><td>444M/0M</td><td>18.5%</td><td>40.6%</td><td>37.6%</td><td>50.6%</td><td>60.3%</td></tr></tbody></table>

Going off of these numbers alone, it would appear that priceline.com has the best valuation of the group, as it has the lowest Forward P/E at 15.9, the lowest PEG at .88, and the highest profit margin, at an astounding 25.6%. However, considering priceline's exposure to Europe, Chipotle's larger relative sell-off, and Lululemon's enormous growth runway, it is impossible to decide from numbers alone which of these companies are ready to be bought.

The Growth Stories

Chipotle: Batting leadoff with Chipotle, I see 3 growth runways that keep me excited, regardless of Einhorn's successful short call or Chipotle's slight misses on its most recent earnings report.

  1. Further Domestic Expansion-  Yes, as exciting and obvious as this sounds, it is Chipotle's main growth driver, as they currently have 1,340 stores in the US versus only 10 internationally.  However, what makes this number fascinating is the rate at which it is expected to grow.  Chipotle has already stated in its most recent 10-Q that they "expect to open at or above the high end of the previously announced range of 155 to 165 expected new restaurant openings in 2012."  Furthermore, they are aiming for 165-180 in 2013, which would represent a huge storefront expansion of over 10% each year. Throw in 4.8% same store sales growth for the 3rd Quarter in 2012 and Chipotle's domestic growth runway is just getting started.
  2. Any International Growth- With 4 shops in Toronto, 5 in London, and one in Paris, Chipotle has only begun to test out the international market.  Considering the wide option of locations available (especially with the current European market) and armed with a new ShopHouse concept, Chipotle will be able to hand pick the markets it chooses to enter, further boosting EPS and maintaining margin.
  3. ShopHouse Southeast Asian Kitchen- As The Motley Fool's own Ron Gross explained in last week's Motley Fool Money podcast, it is fair to see the new ShopHouse concept as essentially being a free addition, along with everything else that Chipotle currently has going for it.  With a new ShopHouse being opened in Los Angeles and two others already being open in D.C., the market has only been tested for this promising new concept.

priceline.com: Much like Chipotle, priceline has a few different growth runways, whether its the further expansion of their priceline.com name here in North America, its expansion internationally to Latin America, or its development of rentalcars.com and a new mobile interface.  With these runways growing at such a high clip and priceline's ability to thrive during the recent recessions in America and Europe, priceline's current valuations offer quite an attractive entry point.  

With a yearly revenue growth rate of 19% over the last decade and an EPS that grew from $.27 to $23.97 in the same timeframe, priceline has more than enough potential to continue growing profits, as more hotels unload extra rooms on its booking.com website. 

Lululemon Athletica: Finally, with Lululemon, E-commerce sales continue to grow, as they currently represent 13% of company sales, up nicely from 8% a year earlier.  Furthermore, Lululemon has added 15 new stores in 2012, boosting its total to 189, showing a commitment to growing its storefront far into the future.  With stores open in only four countries: America, Canada, Australia, and New Zealand, the company has a huge remaining growth runway internationally. 

However, even with such a strong brand name, Lululemon will face headwinds regardless of how well it performs with big time competitors such as Under Armour, Nike, and Adidas.  With higher-priced Nike and Under Armour holding profit margins of only 8.7% and 6.2% respectively, it will be vital to see if Lululemon can maintain their 18% margin.

My Foolish Stance on These 3 Great Companies

As previously mentioned, I truly believe Chipotle has not only one great growth runway, but three and possibly more for the future.  Being Einhorn'd and beat down 40% from its 2012 high, I believe they have clearly entered oversold territory and would be a great buy for the distant future.  I was previously long on Chipotle in CAPS at $330 and firmly believe that todays current price at $250 offers quite a discounted buying opportunity.

Similarly with priceline.com, I am ecstatic to see its PEG drop below 1, as this represents a great sign of cheap future growth.  With such strength shown in poor economic times historically, I believe that priceline is also being traded at a discount today and could go on to surprise with its earnings in early November.  I've had priceline green-thumbed since it traded at $564 and see its current price of $580 as an opportunity to buy a great company at a fair price.

Finally with Lululemon, there is clear growth to be seen, not just historically, but far into the future.  I am however hesitant to jump in on the company, even after its recent drop.  With high analyst expectations for the next two quarters, a Forward P/E that barely breaks 30, and a PEG of 1.38, I am going to keep Lululemon on my watchlist and try to get in on a better value.


Fool blogger Josh Kohn-Lindquist does not own any of companies mentioned in this entry, long or short. The Motley Fool owns shares of Chipotle Mexican Grill and Priceline.com. Motley Fool newsletter services recommend Chipotle Mexican Grill, Lululemon Athletica, and Priceline.com. 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.

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