3 High-ROIC Stocks to Watch During a Market Sell-Off

Key Points

• As the volatility indexes worldwide raise concerns about the future of stocks, investors should stick to the fundamentals this time. 
• Three high-profitable businesses will have Wall Street analysts forecasting double-digit upside, as they typically outperform in recovery rallies.
• They primarily share high ROIC rates, defining their current significance.

During a market sell-off, such as the one investors have been experiencing this week, particularly with Japan’s stock market index (Nikkei 225) selling off by double-digits in a single week only to recover by 12% the day after the crash, investors need to know where their money could be allocated as a discount buying strategy. The last time the market sold off by this much was October 2023, and these types of stocks rallied by double-digits in the following quarter.

History may not repeat this time; recovery could take two quarters or more, but high-ROIC stocks are ready to rally after the sell-off. The important thing for investors to remember is that the following list of stocks has a high probability of eventually rallying from the sell-offs that the S&P 500 might experience soon. The common factor in these companies is one profit measured called return on investment capital (ROIC).

Companies like Ulta Beauty Inc. NASDAQ: ULTA, AutoZone Inc. NYSE: AZO, and even Chipotle Mexican Grill Inc. NYSE: CMG fit this list, as their ROIC rates are above the average business in the S&P 500 and even the NASDAQ 100 indexes. For this reason, dips in these stocks could create a massive opportunity for those with enough liquidity – and courage – to buy when everyone else is panicking.

Why Ulta Beauty Stock Will Create Strong Support in the Coming Months

Most investors don’t realize how defensive skincare and makeup products are, so they categorize stocks like Ulta in the consumer discretionary market.

However, whether the economy is booming or busting, consumers will likely always find room in their budgets to care for their skin and appearance, which is why Ulta should be part of the consumer staples sector instead.

First and foremost, the predictability and steadiness of cash flows in a business such as Ulta can be quantified through the company’s gross margins. A gross margin of 42.7% is impressive for any industry, and it shows market penetration and pricing power for Ulta stock.

With more capital after each sale, management can efficiently reinvest these funds to create a compounding effect for investors. This compounding is set to grow at 29.6% ROIC over the years.

This is also why analysts at the Telsey Advisory Group have a price target of $500 a share for Ulta stock, daring it to rally 52% from its current low. But these analysts weren’t the only ones willing to make their bullish views known.

Those at TD Asset Management decided to boost their stakes in Ulta stock by 14.1% as of August 2024, bringing its net investment to $239.5 million today, or 1.3% ownership in the company.

Interest Rate Cuts Could Ignite a Rally for AutoZone Stock

With over a 90% probability, according to the CME’s FedWatch tool of the Federal Reserve (the Fed) cutting interest rates by September 2024, a few stocks in the consumer space could see a new tailwind for higher prices.

One of these stocks is AutoZone. As a vehicle maintenance and parts retailer, it could be front and center in the new wave of automotive industry demand. However, the level of consumer credit is so high and deteriorating, judged by rising delinquencies, that new vehicle sales won’t be the first thing to tick up.

It will be the overdue maintenance and parts replacement that consumers have probably postponed. At the same time, they get caught up in their credit card payments, and this could be why AutoZone might exploit its high profitability to deliver a new high in its stock price.

Gross margins of 53.2% will allow the same compounding effect that investors see in Ulta stock. This high margin allows management to reinvest capital at an ROIC of 41.7%, which could be one of the reasons why AutoZone stock’s short interest has declined by 4.6% over the past month.

Chipotle’s Business Model Continues to Pay Dividends

Being an affordable place to eat during high inflation is always a winning strategy, which is why Chipotle’s financials show a gross margin of 41%. This puts Chipotle right along the same lines as the other companies on this list, as management can reinvest this capital for higher returns.

But what kind of rates can investors expect from this program? Up to 18% ROIC in this case, and while that may not be as high as the other names on this list, it is still significantly above the rest of the restaurant industry.

Knowing this, Wall Street analysts now expect up to 18.3% EPS growth in the coming year for Chipotle, helping those at Citigroup place a $69 a share price target for Chipotle stock, daring it to rally by 26.2% from where it has dipped to today.

Wall Street isn’t the only one seeing a potentially higher ceiling for Chipotle, however. The stock’s short interest has collapsed by 16% in the past month, a sign of bearish capitulation even in the middle of one of the worst days for the stock market this year.

This sharp decrease in short interest could indicate a turning point, suggesting that market sentiment is shifting positively for Chipotle, potentially paving the way for substantial gains.

Navigating Volatility: High-ROIC Stocks Poised for Growth

Despite recent market turbulence, including sell-offs in indices like the Nikkei 225, high-ROIC stocks such as Ulta Beauty, AutoZone, and Chipotle stand out as strong buying opportunities. These companies, with their impressive ROIC rates and robust financials, are poised to capitalize on market corrections and are well-positioned to benefit from economic recovery, making them attractive options for investors seeking resilience and growth.