There are several indications that the market is looking frothy at the moment. It is trading at higher valuations while macroeconomic pressures are still present, and when that has happened in the past it has led to a correction or even a crash.
Warren Buffett seems to be preparing. He hasn’t said anything about what he thinks is going on in the market right now, but he has raised money from Berkshire Hathaway‘s all-time high, and he has been a net seller of shares for several quarters. It’s not difficult to read between the lines.
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There is no reason to be concerned. First, the market could continue to rise without incident. Historical norms can give you an idea of what might happen, but no one can predict the future. Even if something were to happen, you need to have a portfolio that can protect your investments in a variety of markets and times of uncertainty. If you don’t, now is the time to take action.
If a correction does eventually happen, you should pick up shares of great stocks that look expensive today. I recommend it Shopify (NYSE: STORE). Costco Wholesale (NASDAQ: COST)And Cava (NYSE: CAVA).
There is so much to like about Shopify. It’s the infrastructure that powers much of e-commerce today, and it’s even spawned a new partnership Amazongiving it wider exposure beyond the small and medium sized businesses that form the backbone of its business.
Shopify has hit a rough patch recently as it tried to build on some of its highest growth ever and had to readjust to slowing demand, but it has bounced back on its feet. It’s back to profitable growth, and it’s leaner and stronger. Revenue rose 26% year over year in the third quarter and operating income more than doubled to $283 million.
Management uses different levers to keep growth going, and there are many different growth engines. One of the largest markets is international growth. It is introducing features in several international markets such as Tap to Pay in Australia, UK, Germany and other countries.
The number of international traders increased by 36% year-on-year this quarter. Another area where it excels is its fintech capabilities: Shopify payments increased 31% year over year.
There are so many ways Shopify can continue to grow, and it is benefiting from organic growth in e-commerce as customers continue to adopt it as a form of shopping. Shopify is also integrating more features with an omni model that combines physical retail with digital shopping, offering even more possibilities.
There’s really only one thing I don’t like about Shopify: the price. Shopify stock trades at a one-year price-to-earnings (P/E) ratio of 71 and a price-to-sales ratio of 17. That’s rich even for a top stock. If a market correction occurs, this would be an excellent opportunity to grab shares.
Costco has been steadily beating the market for years. It has a proven membership model that is reliable and stable, and the company even pays dividends.
The story just keeps getting better. In the fourth fiscal quarter of 2024 (ended September 1), traffic increased 5.6% year-over-year in the US and 6.4% globally. The number of paid household members increased by 7.3% to 72.1 million, with about half of these members under the age of 40. That is a young cohort that wants to grow with Costco and can continue its growth.
Paid memberships for executives, which cost double the standard version (€130), increased by 9.6% compared to last year. Executive members accounted for 73.5% of revenue in the third quarter, and more executive members mean greater loyalty and engagement.
Costco offers stable and steady growth. It’s not the most popular stock to follow, but it has made some newsworthy moves in recent months. The company last year issued a special dividend of $15 per share, its highest payout ever, and raised the price of annual membership from $60 to $65 for a standard membership.
It’s a no-brainer stock to have in your portfolio, but Costco stock is trading at an all-time high, at 58 times twelve-month earnings. It may be worth buying even at the current price if you have a long time horizon, but you should definitely buy it if the price drops.
Cava is a small but fast-growing restaurant chain that serves fast-casual dishes with a Mediterranean flavor. It has been compared Chipotle Mexican GrillAnd given this stock’s meteoric rise over the past few years, it’s not surprising that investors have piled into this stock in an attempt to imitate the same gains.
It opened 11 stores in the third quarter, for a total of just 352, but is growing rapidly. The combination of high growth and a long runway looks very attractive. Sales rose 39% year-on-year in the quarter, driven by both the new stores and comparable store sales growth of 18%. That is an excellent result, especially in an economy that is still under pressure. It implies that customers are happy with what they get, and that Cava has a real, viable business.
It also demonstrates healthy profitability. Average unit volume increased from $2.6 million last year to $2.8 million this year, and net income more than doubled to $18 million. It had a fantastic quarter all around and Cava could be a star in the coming years.
However, Cava shares are already up 237% this year and trade at a price-to-earnings ratio of 315. That’s more astronomical than many popular tech stocks, and there’s a lot of growth built into that price. If the market corrects, it could be an excellent growth stock to add to your portfolio.
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*Stock Advisor returns November 25, 2024
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jennifer Saibil has no positions in any of the stocks mentioned. The Motley Fool holds positions in and recommends Amazon, Berkshire Hathaway, Chipotle Mexican Grill, Costco Wholesale, and Shopify. The Motley Fool recommends Cava Group and recommends the following options: Short December 2024 Put $54 on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
Warren Buffett’s stock money. 3 Incredible Stocks to Buy When a Market Correction Happens. was originally published by The Motley Fool
