Late July and early August were a roller-coaster ride for the stock market. The Nasdaq-100 index hit a new all-time high in July but then fell rapidly by more than 10%. Investors are worried about a slowing economy and consumer spending in the United States. There is even talk of a recession.
Smart investors know to avoid the headlines and macroeconomic talk. The folks who are talking of downturns now are the same people who have been predicting a recession every year for the past 15 years. But market declines are normal and should be expected from time to time. Stocks don't go up in a straight line. In fact, investors should embrace those drawdowns as opportunities to buy quality stocks at cheaper prices.
Two consumer stocks stand out to me right now: Lululemon Athletica (LULU -0.47%) and Celsius Holdings (CELH 0.93%). Rather than panicking during this market sell-off, you should buy these stocks instead.
Lululemon: Still leading in athleisure?
Lululemon is one of the world's premier athleisure brands. With its famous yoga pants and leggings, the company has expanded its reach beyond its core demographic of women in North America, pushing into men's athleisure and growing its sales footprint in other countries, most notably China. Thanks in part to those efforts, Lululemon has grown its revenue by 162% over the last five years to an annualized rate of around $10 billion.
The problem is that the core women's category in North America is stagnating. North American sales growth slowed to just 3% last quarter, with men's revenue growth outpacing women's. This indicates that spending among its female customers in North America was close to flat year over year, a huge growth slowdown compared to its usual results from the last 10 years. This explains why the stock is down 50% from its all-time high.
Internationally, Lululemon is still humming along, with sales growing by an impressive 35% year over year last quarter. But investors are concerned that it is losing out to upstart brands such as Alo Yoga. While this could be occurring at the edges, it looks like the company just had a few recent product flops in the women's category that have impacted its growth in North America.
It even pulled its new Breezethrough product line this summer after consumers widely panned the garments' designs as unflattering. That's not great, but it is the sort of issue that should be relatively easy for the company to fix. The company has a strong history of innovating in athleisure and has built up a strong brand over the last 15 years. I think it will retain that position in the years to come.
Recently, Lululemon's price-to-earnings ratio has fallen to about 20, which is well below the S&P 500's average P/E of 28. I think that multiple is much too cheap for a company with such a long history of growth. Those investors who buy some Lululemon stock during this tough period for the company and hold on for the next five to 10 years should profit as the stock will likely recover much of what it lost in its recent decline.
Celsius: Expanding the energy drink category
You may have tried Celsius Holdings' sugar-free vitamin-infused energy drinks. They have been flying off the shelves in North America -- indeed, the millennial-focused upstart brand has rapidly become the third best-selling energy drink in the United States. Positioning itself as a healthier lower-calorie option than segment leaders Monster Energy and Red Bull, Celsius is winning market share among athletic, female, and health-conscious consumers.
Its top line has grown by more than 2,000% over the last few years, pushing its trailing-12-month revenue to just under $1.5 billion. This propelled the stock to massive gains since 2020. However, the stock is now down sharply from its early 2024 peak due to a revenue growth slowdown.
The problem relates to the distribution deal that Celsius inked with PepsiCo a few years ago. That agreement allowed the company to increase its footprint at retailers. Customers couldn't get enough of Celsius, which led Pepsi to greatly increase its inventory purchases. The result was that Celsius' revenue grew by over 100%.
Today, it is clear that Pepsi slightly overbought Celsius inventory. It naturally adjusted, which caused Celsius' revenue growth to slow considerably in recent quarters. Last quarter, its revenue grew by just 23% year over year. This deceleration caught some investors off guard. The market's response is why the stock is down 56% from its all-time high.
Investors who have longer time horizons should look at the big picture. Celsius is still growing sales by 23% year over year even though it is facing a headwind from its inventory overhang. With plenty of room to gain market share and grow sales in international markets (where it has a tiny presence now, but is investing heavily), I think Celsius is a great bet for growth investors now.
