3 Rising-Margin Stocks with Strong Growth Potential

Some businesses go through cycles of expanding and contracting margins, such as basic materials names that depend on commodity prices to derive their bottom-line figures. Then, there are those who enjoy a continuous uptrend in their margins through the use of efficiency, a typical trend that dominates the technology sector with scalability and operational leverage.

Then, there are those who operate in the old model and have yet to jump into the new model through technology. This is where today’s list of stocks with rising margins, through technology implementation, can be a helpful frame for investors to keep in mind when making their subsequent investment decisions, especially in today’s economy.

As the threat of inflation looms in the back of economist’s heads, investors should start to consider buying shares of retail companies with rising margins to outpace inflation, brought to reality by the use of technology. Such names include Domino’s Pizza Inc. DPZ, Shake Shack Inc. SHAK, and even Chipotle Mexican Grill Inc. CMG. All three of these names share one thing in common: rising digital sales to improve margins.

Wall Street Analysts Predict Double-Digit Upside for Domino's Pizza Stock

Even though this stock has stood the test of inflation concerns and delivered up to 19% in performance over the past 12 months alone, Wall Street analysts still think the company could deliver another round of double-digit upswings in the coming months.

The reasoning behind these analysts may be as simple as it gets, driving those at Benchmark to reiterate their Buy rating on Domino’s Pizza stock and place one of the highest price targets of the group at $520 a share. Domino’s Pizza stock would have to rally by as much as 22% from today’s price to prove these new ratings right.

One reason for this renewed bullish sentiment is the company’s business model, which relies heavily on its affordability proposition to customers and its ability to maintain ingredient quality through margin expansion.

Looking into Domino’s Pizza stock’s financials, investors will notice one main trend in the company’s gross margins: They have gone from 31% in the pre-COVID period to a high of 38.6% in post-COVID times. This is all because they have achieved a higher percentage of sales coming from their digital channels, allowing for fewer costs and less overhead to go into each transaction.

Bears know how vital these businesses will be for investors moving forward, so they have started to decrease their short exposure in Domino’s Pizza stock, as judged by the 7.6% decline in short interest over the past month alone.

Shake Shack Stock: Why Analysts See Further Upside Despite Recent Rally

The trend starts to form for Shake Shack stock as well, considering it has already rallied by over 112% in the past 12 months to outperform every single competitor in the space. It has been able to achieve this, and that same reason sets it up for another potential double-digit run.

As of November 2024, analysts at Truist Financial have kept their Buy rating on Shake Shack stock. This time, however, they boosted their valuations up to $144 a share for the company, a significant boost from the previous $127 view. They call for an additional net upside of as much as 14% from where the stock trades today.

That’s not all for the bullish evidence that has stacked up in favor of Shake Shack’s future, though; short sellers realize that Shake Shack’s growing digital sales as a share of net revenue poses a potential run to the upside coming soon, so they also decreased their short positions by 6.1% during the past month alone.

Driving the fear to the bears, Wall Street analysts now project up to $0.36 in earnings per share (EPS) in Shake Shack for the next 12 months, significantly higher than today’s $0.25 level, to justify the upside being predicted for the name.

Chipotle Stock Gains Favor with Institutions as Expanding Margins Fuel Growth Potential

Last but not least, Chipotle stock’s 38.2% rally over the year speaks to the company’s ability to deliver this upside under the right conditions. These conditions are just as present today as they were 12 months ago and are mostly found in the company’s financials.

Chipotle’s gross profit margin stood at an average of 68% before COVID-19, and it now sits at around 70.5%, which shows the efficiencies being implemented by technology and its growing share of digital sales today.

More than that, the National Pension Service has lately decided to add to the institutional buying pressure in the stock.

By boosting their position by as much as 13.7% as of October 2024, they now hold up to $207.4 million worth of Chipotle stock today. This adds to the buying pressure that could come during higher inflation periods in the U.S., helping Chipotle stock get to the upside projected by Wall Street analysts today.

The article "3 Rising-Margin Stocks with Strong Growth Potential" first appeared on MarketBeat.