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2 Hot IPO Stocks That Could Crush the Market

Motley Fool - Wed Aug 23, 9:05AM CDT

The initial public offering (IPO) market has been mostly quiet over the past year after a record amount of IPOs in 2021, a special purpose acquisition company (SPAC) bust last year, and a bear market. But as the market creeps back up and investors are getting more enthusiastic about new opportunities, there have been some strong recent debuts. Cava Group(NYSE: CAVA) and Oddity Tech(NASDAQ: ODD) are two IPO stocks that have incredible potential and could crush the market.

1. Cava: The next big thing in fast-casual dining

Cava was one of the first IPO stocks this year to cause a stir when it debuted in June. It operates a fast-casual concept similar to the one popularized by Chipotle Mexican Grill with a focus on Mediterranean fare, and it's been demonstrating impressive growth.

Revenue increased 62% in the 2023 second quarter, and unlike many fast-growing restaurant chains, it wasn't driven primarily by new stores but an 18% increase in comparable sales. That's a key metric to watch, because it signifies loyalty, brand power, and organic growth prospects.

The company opened 16 new stores in the quarter for a total of 279, a drop in the bucket compared with Chipotle's 3,200. Management says it has "proven portability" and has stores in diverse areas across the country, including both coasts. A chain that can build through both levers, new stores and higher same-store sales, could be a powerhouse.

What stood out in the report, its first as a public company, is the improved profitability. Restaurant-level profit margin was 26.1%, four percentage points higher than the year-ago period. That means it's making more profit from each store. But the big surprise was a net profit of $6.5 million after posting mostly quarterly losses including $8.2 million last year. It hasn't all been losses, which points to strong potential to become sustainably profitable, and this update indicates Cava is on the right track.

It may be too early to buy Cava stock right now. The stock was priced at $22 at its IPO but gained nearly 100% on the first day of trading. After climbing above $55 per share, it has come back down to the $40 range. Most retail investors should wait to buy an IPO stock because the price can be very volatile when it first trades, especially if it's a newcomer that draws a lot of attention. Also, prices can become inflated before the lockup period is over. However, the valuation has decreased to 6 times trailing-12-month sales, which could be reasonable considering Cava's opportunity.

Over the long term, Cava looks like it could be a market-crushing stock, and investors should keep it on their watch lists.

2. Oddity: An enormous opportunity in digital cosmetics

Oddity is even newer than Cava with an IPO just a month ago. What's enticing about Oddity is that it's posting high growth and has also been profitable for a while, which is a feat most growth stocks take a long time to achieve.

Oddity markets cosmetics and skincare products digitally on its sister sites Il Makiage and SpoiledChild. This is a growing industry, and Oddity is well placed to benefit. It stands out from competing companies in several important ways. It works with influencers, who use Oddity's video platform to create reviews and tutorials. This provides a social media network for marketing as well as fresh site content to keep customers engaged. It also considers itself a technology-first, artificial intelligence (AI)-based company that's harnessing specialized systems to provide customers what other companies can't. For example, it uses hyperspectral capabilities that can assess a person's skincare needs with a smartphone.

Oddity recently delivered record second-quarter and year-to-date results, beating management's quarterly guidance with a 55% year-over-year revenue increase to $151 million. Net income was $30.0 million, up from $16.6 million last year, with a profit margin of 19.8%. It generated $21.6 million in free cash flow and has no debt.

This is a winning company that's firing on all cylinders. Its price is starting to come down from its post-IPO high and has declined 5% since the first-day closing price. That's still not enough to make this a buy right now as the company tries to establish itself and maintain high growth rates. If it keeps this up, it could be an incredible, market-beating stock.

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Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool has a disclosure policy.

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