Nike (NYSE: NKE) is one of the great investing success stories over the past several decades. Thanks to an iconic brand, the marketing savvy to align itself with sports icons -- Michael Jordan, Serena Williams, Tiger Woods, Roger Federer, Cristiano Ronaldo, and more -- and a penchant for generating high rates of return on sales, Nike has turned a mere $100 in 1980 to more than $50,000 today on a total-return, split-adjusted basis.
Stocks like Nike are the ones that will build wealth for investors. The problem is that being able to identify a company like Nike in its infancy is hard. So we asked three of our investing contributors to each highlight a stock they foresee as one that is in a position to generate returns over the long haul as Nike has. Here's why they picked First Solar (NASDAQ: FSLR), Square (NYSE: SQ), and Ulta Beauty (NASDAQ: ULTA).
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The "aha" moment for the solar industry finally arrived
Tyler Crowe (First Solar): Throughout history, new sources of energy come along that tend to be token contributors to the overall energy picture for many years. Then comes a moment when the new energy source becomes cost-competitive with legacy sources. When that moment happens, the overall use of that particular source skyrockets. It happened with coal in the early 1860s, petroleum around 1910, natural gas in the 1940s, and nuclear in the 1970s.
For the past several decades, solar energy has been in the "token source" stage of development. It was a compelling concept that relied on a cheap, abundant source, but the economics and technology limitations meant it wasn't cost-competitive with those more established sources. Over the past two years, though, that dynamic has shifted, and solar energy is cost-competitive with legacy energy sources. If history is any lesson, then we're on the precipice of a meteoric rise of solar power -- even more so than the incredible growth we have seen in recent years.
Of the companies out there that look well-positioned to reap the benefits of this trend, First Solar appears to be one of the best bets. While the industry has gone through some ups and downs from rapid waves of over- and under-capacity, First Solar has remained a top solar panel provider with the best rates of return in the business and an enviable balance sheet, with much more cash than debt outstanding. Today, the company is in the middle of shifting its production facilities to manufacture its newest panel, the Series 6, and has the financial firepower to jump into growth mode quickly if it so chooses.
The opportunity for solar power -- and First Solar in particular -- is immense, and the industry is now in a position to take a larger and larger portion of the benefits.
Revolutionizing digital payments
Travis Hoium (Square): In 1980, Nike was a well-known brand, but it was still a relatively small player in the sneaker and apparel market around the world. Using superior branding in a growing sporting goods market, Nike became one of the most recognizable companies in the world.
Square is a company that I think has a lot of the same characteristics in that it is facing larger payment processors but is leveraging its brand and unique technology to grow rapidly. What Square has been able to do is build a popular credit card processor and leverage that position to build a platform that small businesses use to grow. For today's new businesses, Square isn't just a payment processor -- it can also be used for payroll, scheduling, accounting, and even getting capital.
The brand is just as important for Square going forward because larger companies like PayPal and First Data have a much bigger installed base. What Square has done is becoming synonymous with small businesses, and if you're starting a small business, Square is probably the first place you'll look for payment processing and other back-office solutions. As Square expands this platform, it becomes harder for competitors to enter, increasing the company's power in the marketplace.
If current growth trends continue, one day Square could be the company that's synonymous with digital and mobile payments, just like Nike is with sporting goods.
A stock with value more than skin deep
Rich Duprey (Ulta Beauty): Wall Street may have decided that Ulta Beauty has not aged gracefully, but the beauty-salon operator is more than the stock equivalent of putting lipstick on a pig.
Although the cosmetics industry is seeing more competition these days as numerous retailers turn to the category to bolster their own flagging operations, Ulta Beauty continues to perform ahead of expectations. Analysts feel it will get bogged down by slowing growth, but with its third-quarter earnings due this Thursday, it's got a good chance to surprise the market with its strength.
Even though Wall Street has soured on it, Ulta previously reported rising customer traffic, increased spending per customer, and soaring e-commerce sales, which are becoming a key component of its business. Over the past two decades, it has become the top national beauty-care retailer, offering more than 20,000 products from over 500 vendors at 990 stores.
The beauty-care specialist has a popular loyalty program with over 24 million members, which has helped it gain market share across all of its major categories, particularly in prestige cosmetics, mass market, and prestige skin care. It continues to focus on the competitive advantage it derives from its teams of beauty-care specialists working in a salon setting.
At 28 times earnings and 22 times next year's estimates, Ulta Beauty may seem expensive. However, as the industry leader that's been enjoying outsized growth, it perhaps deserves the premium pricing, just as Nike did more than 30 years ago as it jumped into the dominant position in footwear.
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Rich Duprey has no position in any of the stocks mentioned. Travis Hoium owns shares of First Solar and Square. Tyler Crowe owns shares of First Solar. The Motley Fool owns shares of and recommends Nike. The Motley Fool owns shares of Square. The Motley Fool recommends First Solar and Ulta Beauty. The Motley Fool has a disclosure policy.