1 Stock to Buy and 1 to Avoid This Octobe

A rising stock price is usually positive, but it can become unaffordable for individual investors. To address this, companies may perform stock splits, reducing the share price while increasing the number of shares available.

This indicates a company’s long-term success, making shares more appealing, even though the split doesn’t change the overall market valuation.

Earlier this year, Chipotle Mexican Grill (CMG 1.07%) and Williams-Sonoma (WSM 1.23%) did 50-for-1 and 2-for-1 stock splits, respectively. However, neither stock has performed well since then. One is a buy; the other should be avoided for now.

Why Chipotle Is An Obvious Buy

Chipotle’s simple business model and impressive track record make it a strong choice. The chain focuses on fresh Mexican cuisine and has expanded steadily. Since 2006, its stock has soared by 6,590%, significantly outpacing the S&P 500 index.

Chipotle generated $1.3 billion in free cash flow from $10.66 billion in sales last year. It uses profits for store expansion and stock repurchases. Over the last decade, its share count has decreased by nearly 12%, while earnings per share have risen by 262%. With only 3,146 stores in the US, Chipotle has room for growth.

Recently, Chipotle’s CEO left for Starbucks, contributing to a drop in stock performance after the split. Despite market conditions, analysts predict a 22% annual earnings growth, making its forward P/E of 54 reasonable for long-term holders.

Why You Should Avoid Williams-Sonoma for Now

Williams-Sonoma, known for high-end home goods, faces challenges amid consumer spending cuts. Although its lifetime returns have exceeded 42,000%, current economic conditions aren’t favorable for luxury goods.

Despite being cheaper at under 18 times estimated earnings for 2024, analysts expect only about 6% earnings growth over the next few years. With reduced guidance, it’s wise to wait for potentially better buying opportunities. I still see Williams-Sonoma as a solid long-term investment, but caution is advised given the current economic climate.