Investors who need more time or knowledge to pick individual stocks tend to walk away with the high single-digit returns that the S&P 500 historically offers. However, now that the stock market is entering a new cycle of lower interest rates and steepening yield curves, it is best to pick a select few companies with the potential to outperform for the next decade.
Looking that far ahead is hard to imagine, but Warren Buffett does it best by finding companies that not only sell for low valuations compared to their intrinsic value but also carry high margins to show pricing power and market share dominance. In addition to these features, the returns on invested capital (ROIC) rates are necessary to spot a stock that could turn into a compounding multi-bagger in the future.
Today, retail investors can follow in the footsteps of Wall Street’s biggest investors by looking into stocks like Alibaba Group (NYSE: BABA), Ulta Beauty Inc. (NASDAQ: ULTA) and even Mercado Libre Inc. (NASDAQ: MELI). Owned by some of the best investing names out there, these businesses all have the potential to turn into multi-baggers in the years to come for those who know what to look out for.
Alibaba Stock's Discount Presents a Strong Buy for Long-Term Compound Returns
Compared to peers like Amazon.com Inc. (NASDAQ: AMZN) in the United States, Alibaba's forward P/E ratio of 11.8x presents a significant discount to Amazon's 36.4x valuation today. For those who live and die by the saying, "It must be cheap for a reason," here's David Tepper from Appaloosa to explain.
In a recent CNBC interview, Tepper—who manages over $5 trillion—recommended buying "everything" related to China. The Chinese government has just cut interest rates by the same amount as the Federal Reserve (the Fed) in the U.S., with one major difference.
Valuations in the S&P 500 are near all-time highs, while the valuations in the iShares MSCI China ETF (NASDAQ: MCHI) are still at a historical low in comparison. This made Tepper buy up to 10.5 million shares of Alibaba, valued at roughly $1.1 billion today, which is his largest holding in the fund.
Last time both the U.S. and China cut interest rates, Alibaba reached its all-time high price of $315 a share. Considering today's price is only a third of that high, investors now have a reference point to expect a tripling in Alibaba stock. There are those on Wall Street who have started to stand out from the pack in their bullish views for the stock as well.
Those at Susquehanna have landed on a $130 price target for Alibaba stock as of August 2024, calling for a net upside of as much as 21.2% from where it has rallied to today. As sentiment and momentum improve for Alibaba, more analysts may come in to boost their own valuations of the company.
A Buffett Bet Is Always a Smart Investment Move
According to recent 13-F filings, Warren Buffett has found enough reason to invest up to 690,000 shares in Ulta stock, a position valued at roughly $278.8 million today. Considering Buffett typically makes much bigger stakes, it could be reasonable to expect him to scale more into the company in the coming months.
Some of the reasons behind his choice are the business model itself. Most investors see Ulta as a consumer discretionary stock. Still, it is more of a consumer staples name, as skincare and makeup buyers will likely always make room in their budgets for these products.
More than that, the company’s pricing power and market share dominance are seen through its gross margins of up to 42.5% today, which is an impressive level in the retail industry. Here’s where the compounding effect comes from, though: Ulta generated up to 28.2% ROIC over the past 12 months, setting the stage for it to become a multi-bagger.
Those at Loop Capital agree as they have landed on a $450 a share price target for Ulta stock, calling for a net upside of up to 11.3% from where it trades today. This is only a fraction of the company’s 52-week high set at $574.8, which still does not reflect how high the company’s valuation could go in the future.
Mercado Libre: The Unlikely Stock with Double-Digit Growth Potential Ahead
While Mercado Libre hasn’t made the sort of headlines others on this list have, it still warrants a second look from investors today. With the company’s gross margins, investors can see a staggering 54.7% margin to stay above most of the competition.
More importantly, investors can see Mercado Libre’s ROIC rate of 20.9% today to create a path for a future compounder in the coming years. Now that the stock trades at 96% of its 52-week high, investors now count on bullish price momentum on the side of the company, but it doesn’t end there.
Analysts at Cantor Fitzgerald now see a valuation of up to $2,530 for the stock, which calls for up to 22.6% upside from where the stock trades today and a new 52-week high. More than that, those at Paragon Capital Management decided to boost their holdings in Mercado Libre stock by 6.8% as of last week, bringing their net investment to $2.3 million.
Wall Street sentiment is improving, and institutions are still finding enough reasons to buy Mercado Libre stock near its recent highs, and it’s all got to do with the company’s ability to compound capital at double-digit rates.
