This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
If you want to invest like a billionaire, you have to be willing to buy shares when a company is experiencing temporary problems. It's only when the near-term outlook is gloomy that you can invest in a great business below what it's worth.
Pershing Square's Bill Ackman and Berkshire Hathaway CEO Warren Buffett have executed a value-based strategy to amass multi-billion-dollar fortunes. While Wall Street chases hot tech stocks, Ackman and Buffett are finding great value in these top retail brands. Let's see perhaps why.
1. Nike
Pershing Square disclosed a portfolio of U.S.-based stocks worth $10 billion in the second quarter. It added two new stocks to the portfolio, including Nike (NYSE: NKE). Ackman's investment strategy involves buying stakes of large, profitable companies when they are on sale, and Nike certainly fits the bill. It dominates the sportswear market with $51 billion in trailing revenue -- and footwear generates two-thirds of that amount.
Nike didn't get to where it is today without plenty of ups and downs over the past 50 years. For an apparel business, revenue can falter during economic recessions or periods of soft consumer demand. High inflation and interest rates have taken a toll on the consumer over the last few years, and Nike felt the sting. The company's revenue fell 2% year over year in the May-ending fiscal fourth quarter.
Management is calling fiscal 2025 a transition year as it repositions itself for long-term growth.
Ackman's purchase is timely. Nike stock is trading at its lowest price-to-earnings (P/E) multiple since 2017. Before the recent revenue decline, Wall Street analysts were expecting Nike to grow earnings at double-digit rates over the long term. Nike can still achieve that pace.
Importantly, most of Nike's problem stems from its lifestyle products. Revenue from performance products, such as running and basketball shoes, grew at healthy rates in the quarter. Demand for fitness products was a positive contributor to the apparel business, and management likes the specific opportunity it sees in women's apparel.
The global sports apparel market is expected to reach $293 billion by 2030. That's an incremental increase of $70 billion over 2023, which is greater than Nike's annual revenue. As a leading brand with a large marketing budget, Nike will undoubtedly grow again, so buying the stock at these lower share prices could pay off handsomely in five years.
2. Ulta Beauty
Warren Buffett's company disclosed a new stake in leading cosmetics retailer Ulta Beauty (NASDAQ: ULTA) last quarter. It's another example of a great investor pouncing on an opportunity to buy an industry-leading business at a fire sale price.
The beauty industry was booming coming out of the pandemic, and it's forecast to grow over the next several years. As an industry leader, Ulta has a competitive advantage based on a wide selection of products across salon styling, skincare, fragrance, and cosmetics. It operates over 1,400 stores that are strategically positioned in high-traffic areas.
The company delivered annualised revenue growth of 15% over the past 10 years, with earnings clocking in at a robust 23% per year, which speaks to the opportunities for this leading retailer to expand and gain market share. However, comparable-store sales fell 1% year over year in the recent quarter, sending the stock down 31% off its previous high.
The strong growth in the beauty market over the last few years has brought more competition. Management noted there are more places to buy beauty products, with over 1,000 new points of distribution opened in the last few years. This has pressured Ulta Beauty's market share.
Still, Buffett or one of his investing deputies is clearly focusing on Ulta Beauty's brand and ability to use that advantage to regain market share. It starts with Ulta's loyalty program, which grew 5% year over year last quarter to 43.9 million members. Offering more value through its loyalty program is a big opportunity for Ulta Beauty to navigate the near-term headwinds in consumer spending and come out on top over the next few years.
The stock currently trades at a forward price-to-earnings ratio of 16 based on next year's earnings estimate. Ulta has tremendous long-term potential. It generates just $11 billion in annual revenue in an industry expected to reach $129 billion by 2028, according to Statista. The stock can deliver excellent returns from here.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
