When a company’s stock price rises continuously, it can become too expensive for individual investors. To address this, companies may conduct stock splits, which reduce the share price by increasing the number of shares available.
This usually reflects a company’s long-term success and often attracts more investors, even though a split doesn’t alter the company’s overall value.
Earlier this year, Chipotle Mexican Grill (CMG 0.89%) and Williams-Sonoma (WSM 1.37%) executed 50-for-1 and 2-for-1 stock splits, respectively.
Despite the splits, both stocks have underperformed, but one is still a strong buy while the other may be best to avoid for now.
Chipotle: A Buy Due to Growth Potential
Chipotle has a straightforward model that has yielded impressive success, with a return of 6,590% since 2006. Its menu is simple, with fresh ingredients attracting steady growth. In the last year, it generated $1.3 billion in free cash flow on $10.66 billion in sales. The company uses profits for expansion and stock buybacks, leading to a 262% increase in earnings per share over the past decade.
However, CEO Brian Niccol’s unexpected exit to join Starbucks has contributed to the stock’s recent performance issues. Analysts expect Chipotle’s earnings to grow by 22% annually in the long term, making its current valuation potentially reasonable for long-term investors.
Williams-Sonoma: A Cautionary Tale in Luxury Retail
Williams-Sonoma is known for high-end home goods and has performed well historically, boasting lifetime returns exceeding 42,000%. However, its appeal wanes as consumer purchases tighten, particularly for luxury items. With inflation affecting buying power, the company anticipates a revenue decline of 1.5% to 4% in 2024 after revising its earnings guidance.
Despite appearing less expensive than Chipotle, analysts expect only about 6% annual earnings growth for Williams-Sonoma. Economic challenges may yield better buying opportunities later. While I believe in its long-term potential, caution is advised.
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