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2 Stocks That Could Be Easy Wealth Builders

Motley Fool - Tue Apr 9, 4:45AM CDT

Wealth building is one of the primary reasons individuals invest in the stock market. Considering the history of companies like Home Depot and Amazon, many growth investors hope to find small-cap or mid-cap stocks destined to become the next large-caps or mega-caps.

Finding such stocks takes hard work and luck, and that assumes unforeseen events don't derail potentially lucrative stocks.

Nonetheless, regional companies moving toward national or international expansion can yield outsized returns. To that end, consumer stocks such as Dutch Bros (NYSE: BROS) and Cava Group (NYSE: CAVA) could outperform the S&P 500 as they rapidly expand their footprints.

1. Dutch Bros

Dutch Bros may not look like a winning investment on some levels. After all, Starbucks leads the coffee shop market, and with numerous independents, private chains like Dunkin, and an emerging chain owned by McDonald's also competing in this market, Dutch Bros does not look like a stock that would gain much traction.

However, its selection of teas, lemonades, energy drinks, smoothies, and coffees has proven popular with consumers. The chain has grown to 831 locations across 16 states, up from 716 locations in 14 states one year ago. That shows Dutch Bros is making rapid progress in pushing its nationwide expansion.

Such growth led to $966 million in revenue in 2023, a 31% increase from year-ago levels. Moreover, Dutch Bros has now become profitable, earning $1.7 million in net income attributable to the company. It lost about $5 million attributable to the company in 2022.

Despite its potential, Dutch Bros stock has lost money for many of its investors, a factor likely attributable to an ill-timed IPO in the fall of 2021. Also, as a newly profitable company, its profit margin is too small to yield a P/E ratio that reflects its valuation.

Still, its price-to-sales (P/S) ratio of 2.1 is well under the 2.7 sales multiple for Starbucks. Also, Dutch Bros' relatively small size means it can earn significant revenue growth simply by expanding. That growth process should eventually bring investors back into the company's stock as it serves an ever-larger part of the U.S.

2. Cava Group

Much like Dutch Bros is following in Starbucks's footsteps, one might wonder if Cava is following the Chipotle playbook. Like the fast-casual giant, Cava offers healthy, delicious fast food. However, it stands out by taking that approach with Mediterranean cuisine.

As of the end of 2023, the company had grown to 309 restaurants in 24 states and Washington, D.C., up from 237 at the end of 2022.

The company has established a goal of reaching 1,000 locations by the end of 2032. To that end, it plans to open an average of 77 additional restaurants per year until then, and possibly more restaurants elsewhere once it reaches that goal.

Through that strategy, Cava earned $729 million in revenue in 2023, a 29% increase from year-ago levels. Fortunately, it limited the growth in operating expenses to 18%. Thus, it earned a profit of $13 million in 2023, a significant improvement from the $59 million loss in the prior year.

Investors are increasingly discovering Cava's potential. Since its IPO in June, the stock has risen by nearly 50%.

However, that growth has also taken its P/S ratio to 8.9. While that level might deter investors, they should also remember that Chipotle's sales multiple is not far behind at 8.2.

Additionally, Cava's market cap is just over $7 billion, far below Chipotle's $80 billion market cap. Hence, Cava's smaller size makes higher-percentage growth easier to achieve. That factor, along with probable revenue and profit increases from a nationwide expansion, may make Cava Group stock worth that premium.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Chipotle Mexican Grill, Home Depot, and Starbucks. The Motley Fool recommends Cava Group. The Motley Fool has a disclosure policy.

Paid Post: Content produced by Motley Fool. The Globe and Mail was not involved, and material was not reviewed prior to publication.

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