Rising stock prices are usually a good sign, but they can become too expensive for individual investors. To make shares more affordable, companies often do stock splits, which lower the price while increasing the number of shares available.
A stock split indicates a company has been successful, making it more appealing to investors, although it doesn’t change the company’s overall value.
This year, Chipotle Mexican Grill (CMG 0.89%) and Williams-Sonoma (WSM 1.37%) performed 50-for-1 and 2-for-1 stock splits, respectively. However, both stocks have struggled since the splits. One is a strong buy, while the other should be avoided for now.
Chipotle: A Strong Buy
Chipotle has seen impressive growth, with a 6,590% return since 2006. Its menu is simple, featuring fresh Mexican food in various forms like burritos and bowls.
In the last year, Chipotle generated $1.3 billion in free cash flow from $10.66 billion in sales. The company uses profits to expand and repurchase stock, enhancing earnings. Despite having only 3,146 stores mainly in the U.S., Chipotle continues to open new locations.
After a recent management change, Chipotle’s stock performance has been weak, but forecasts indicate 22% annual earnings growth, making it a potentially good investment.
Avoid Williams-Sonoma for Now
Williams-Sonoma is a retailer of luxury home goods and boasts impressive long-term returns. However, amid economic struggles, consumers may cut back on high-end purchases.
With rising inflation and household debt, Williams-Sonoma expects a revenue decline of 1.5% to 4% in 2024, which raises concerns about its current stock appeal.
Although Williams-Sonoma’s stock seems cheaper than Chipotle’s, its lower earnings growth projections and recent guidance cuts suggest that investors should wait for better opportunities.
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