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Chipotle Mexican Grill(CMG-N)

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The Smartest Investors Are Buying These 3 Stocks Hand Over Fist

Motley Fool - Thu Aug 31, 4:47AM CDT

Purchasing promising growth stocks is a great way to build wealth, but you also need to be mindful of the risks rather than focusing solely on the benefits.

You should look for businesses with a great brand or track record and leadership in their respective industries. They should also have good management and long-term catalysts that can propel revenue and profits.

You can consider these three stocks with the above characteristics for your portfolio.

Burrito served on plate

Image source: Getty images.

1. Chipotle Mexican Grill

Chipotle Mexican Grill(NYSE: CMG) is a Mexican restaurant chain with over 3,250 locations as of June 30. The company has demonstrated impressive growth through the pandemic even as many restaurants closed.

A major reason for Chipotle's success is the introduction of a drive-thru option called Chipotlanes in 2019. Customers can order by mobile phone and pick up their food without having to leave their car, which allowed it to continue operating through the pandemic.

From 2020 to 2022, the restaurant chain saw revenue rise from $6 billion to $8.6 billion while net income more than doubled from $355.8 million to $899.1 million over the same period. Chipotle also generated healthy positive free cash flow during all three years, with an average annual figure of $658 million.

Its strong momentum continued in the first half of 2023. Revenue climbed 15.3% year over year to $4.9 billion in the first six months of this year while operating income jumped 51.5% to $799.4 million. Net income also improved by 51.5% to $633.4 million.

Free-cash-flow generation was even better, more than doubling year over year from $373.2 million to $780 million. Comparable-restaurant sales increased by 10.9% in the first quarter and 7.4% in the second quarter.

Chipotle plans to open between 255 and 285 new stores for the full year. Further growth could be in the cards with management announcing its maiden development agreement in the Middle East, part of the effort to accelerate its international expansion, with the first openings planned in Dubai and Kuwait in early 2024 before expanding further into the region.

2. Atlassian

Atlassian(NASDAQ: TEAM) operates a software-as-a-service platform with work-management tools that allow businesses' employee teams to organize and collaborate. The company was an early bird in recognizing the need for distributed teams to cooperate across various locations, and its platform had greater adoption during the pandemic as remote work became the norm.

Revenue rose from $1.6 billion for fiscal 2020 (ending June 30) to $2.8 billion for fiscal 2022. Of this total, subscription revenue's portion rose from 57.7% in 2020 to nearly three-quarters by fiscal 2022. Although Atlassian reported losses in all three years, the company generated increasing positive free cash flow, boosting it from $538.5 million to $808.9 million over the same period.

Fiscal 2023 saw this trend continue with revenue growing by 26.1% year over year to $3.5 billion, with 82.7% of that being subscription revenue. The company also generated positive free cash flow of $842.3 million. The total number of customers rose 8.1% year over year to 262,337, but the key metric was the 52% year-over-year jump in the number of customers that spent $1 million or more.

Atlassian keeps enhancing its services, aiming to increase stickiness among its customers. This year, for example, it rolled out a "virtual teammate" based on generative artificial intelligence (AI) called Atlassian Intelligence to ensure 24/7 help with team members' questions and to help analyze and summarize data.

The company expects cloud revenue growth between 25% and 30% year over year for fiscal 2024, and I'm confident it can continue to churn out healthy free cash flow and steady growth.

3. Coupang

With the explosion in online sales, Coupang(NYSE: CPNG), a South Korean e-commerce company, is in a great position to benefit. It had its initial public offering (IPO) more than two years ago amid the pandemic-led e-commerce boom that saw it soaring far above its IPO price of $35.

Although the stock has since fallen around 47% from its listing price, it could be ready to soar as the business has reported four straight quarters of profit. From 2020 to 2022, revenue increased from $12 billion to $20.6 billion. Operating and net losses were diminishing over the three years, and the company generated positive operating cash flow in two out of those three years.

The turning point seemed to have arrived when Coupang reported both an operating and a net profit for the first half of 2023, leading investors to believe that this could be the first full year with a profit. Revenue shot up 14.6% year over year to 11.6 billion, and the business generated net income of $236 million. Free cash flow was $849.4 million over the same period, allowing management to invest for further growth.

Active customers increased by 10% year over year to hit 20 million. The company aims to expand into Taiwan, having set aside $400 million to develop services such as video streaming, food delivery, and fintech in that country. Coupang was the most downloaded app in Taiwan in the second quarter of 2023, so the company is confident it can capture market share and grow its business there further.

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Royston Yang has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Atlassian, Chipotle Mexican Grill, and Coupang. The Motley Fool has a disclosure policy.

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