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3 High-Quality Value Stocks You Should Know

Ulta Salon, Cosmetics and Fragrance Retail Location.

Key Points

  • These are three quality stocks that every investor should keep on a watchlist. They meet the three typical requirements that mega investors look for.
  • With great margins and moats around their products and services, Wall Street analysts are willing to give them a double-digit upside.
  • Predictable cash flow and profits will help investors compound their capital for years.
  • 5 stocks we like better than Carvana

Investors looking for worthwhile companies to add to their portfolios should consider a few factors that make up a ‘high-quality’ stock. The company’s product or service and the relative moat around them are among these factors. Moat is a word today’s newer retail investors throw around, so here’s a better definition.

A relatively recession-proof product or service with predictable demand—that is ideally growing—is needed. These products or services can be found in companies like Colgate-Palmolive NYSE: CL or H&R Block Inc. NYSE: HRB, as they are needed regardless of what the underlying economy is doing. As these are one extreme of stability and predictability, their stock price becomes boring.

Not swinging into the ‘unpredictable’ or ‘unstable’ side of the spectrum, investors can find the middle in stocks like Copart Inc. NASDAQ: CPRT, Ulta Beauty Inc. NASDAQ: ULTA, and even Altria Group Inc. NYSE: MO and the products or services they offer. More than that, a few other business requirements need to be met, including:

Three  Must-Haves for Every Value Investor

Once an investor can identify a product or service that is predictable and stable in demand through the economic cycle but not too stable or predictable to wash away the investment's wealth-compounding effects, further financial ratios can be analyzed. 

Focusing on profitability and bringing home the bacon (returns) for investors, these are some of the few that Warren Buffett fans boast about in their books and Twitter (now X) accounts:


  1. Gross Margins: Businesses with gross margins above 20% typically achieve this by having an attractive positioning in their respective market or niche, which translates into pricing power and audience penetration.
  2. Return on Invested Capital (ROIC): This tells investors what each dollar invested into the business is expected to return to them; of course, the higher, the better, as ROIC can determine a wealth-building investment from the start.
  3. Reasonable debt: Counting with these two first requirements would amount to nothing if the business carries a heavier-than-ideal debt burden, so a relatively low percentage of debt (as a total of the balance sheet). 

Now that investors have a post-it note-sized guide, it is easier to stay on track when looking over the stocks on this list. 

Ulta’s Dip Comes First and Foremost

Ulta Beauty Today

Ulta Beauty, Inc. stock logo
ULTAULTA 90-day performance
Ulta Beauty
$390.82
-5.57 (-1.41%)
(As of 06/14/2024 ET)
52-Week Range
$368.02
$574.76
P/E Ratio
15.24
Price Target
$507.30

After coming down to only 66% of its 52-week high price, shares of Ulta Beauty could become attractive for those investors looking to buy a one-quality business at a discount today. 

Make-up and other skincare products are typically part of this ‘moat’ category, as their user base will probably keep making a budget for them regardless of whether the economy is booming or busting. 

Investors can quantify this relationship in the company’s financials, which show a gross margin rate of up to 43%. Keeping more dollars each time a sale is made enables management to reinvest this capital at high rates of return, where Ulta’s steady 25% average ROIC comes in to steal the spotlight.

Last but not least, Ulta’s balance sheet shows that only 45% of total capital comprises debt. Because leases on the property are considered debts, Ulta’s physical locations (and their leases) represent most of this debt balance, with nothing to worry about. 

And analysts really aren’t worried, as the stock holds a consensus price target of $535.5 a share, daring it to rally by as much as 40.2% from where it trades today. 

Copart Stock is Good Enough for Smart Money

Copart Today

Copart, Inc. stock logo
CPRTCPRT 90-day performance
Copart
$53.21
+0.15 (+0.28%)
(As of 06/14/2024 ET)
52-Week Range
$42.41
$58.58
P/E Ratio
37.47
Price Target
$51.00

Which isn’t that smart if retail investors follow this simple formula. Up to $14.9 billion in institutional buying was reported for Copart over the past 12 months; if it’s good enough for them, it’s good enough for anyone, and here’s why. 

A 47.3% gross margin is characteristic of many technology companies. However, this is more of an automotive stock with a technology layer added on top, like Carvana Co. NYSE: CVNA, but better.

Better how? Carvana has barely any profits, so its ROIC for the past 12 months (the only positive one) was only 1.8%. Compared to Copart’s average of 15.5% over the past 5 years, this is one quality stock to follow. 

The best part is that the company has barely any debt, as its balance sheet shows only 1.5% of total capital being debt. No wonder the stock recently traded up to 94% of its 52-week high.

Altria’s Returns Show Saints Don’t Live on Wall Street

Altria Group Today

Altria Group, Inc. stock logo
MOMO 90-day performance
Altria Group
$44.32
-0.44 (-0.98%)
(As of 06/14/2024 ET)
52-Week Range
$39.06
$47.19
Dividend Yield
8.84%
P/E Ratio
9.27
Price Target
$46.90

Shares of Altria are trading at a new 52-week high, though today’s price remains only a fraction of the stock’s all-time high of $77.8 in 2017, giving investors a bit more bullish breathing room.

Investors can check these features off the list when examining the company's financials, starting with gross margins. As of the past 12 months, Altria's margins stood at 69.5%, proving the brand's pricing power and market penetration through tobacco and other non-cyclical products.

Keeping more capital rotating within the business allows management to recently deliver an ROIC rate of 36.2%, with a five-year average of 32%, making Altria stock a potential wealth compound candidate.

Following this thread, analysts at Jefferies Financial saw fit to set a price target of $56 a share for Altria. The stock would need to rally by 20.9% from its current level to prove these predictions correct. 

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Should you invest $1,000 in Carvana right now?

Before you consider Carvana, you'll want to hear this.

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While Carvana currently has a "Hold" rating among analysts, top-rated analysts believe these five stocks are better buys.

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Gabriel Osorio-Mazilli
About The Author

Gabriel Osorio-Mazilli

Contributing Author

Value Stocks, Asian Markets, Macro Economics

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Companies Mentioned in This Article

CompanyMarketRank™Current PricePrice ChangeDividend YieldP/E RatioConsensus RatingConsensus Price Target
Colgate-Palmolive (CL)
4.8049 of 5 stars
$94.62-0.1%2.11%29.94Moderate Buy$92.94
H&R Block (HRB)
3.0627 of 5 stars
$50.36-0.7%2.54%11.52Hold$49.00
Ulta Beauty (ULTA)
4.862 of 5 stars
$390.82-1.4%N/A15.24Moderate Buy$507.30
Altria Group (MO)
3.3887 of 5 stars
$44.32-1.0%8.84%9.27Hold$46.90
Carvana (CVNA)
2.5984 of 5 stars
$103.06-3.4%N/A45.20Hold$84.36
Compare These Stocks  Add These Stocks to My Watchlist 


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