The S&P 500 index has rocketed to new highs this year, but not all companies in all industries have seen their shares hit new highs. The retail sector has underperformed the broader market over the last three years, but that means there are compelling retail growth stocks selling at very reasonable valuations relative to their future potential.

Below are three companies that operate in growing markets like beauty and athletic wear. The S&P 500’s historical average annual return is about 10%, but these hot brands are growing their revenue at much higher rates, and their stocks trade at fair valuations that should allow an investor buying shares today to easily outpace the broader market.

1. E.l.f. Beauty

Investors that identify brands before they become household names can make a fortune. E.l.f. Beauty (NYSE: ELF) is one of the fastest-growing consumer brands right now. The stock soared 424% over the last three years as the company’s blend of value, product innovation, and savvy marketing continues to fuel robust revenue growth.

Revenue grew 50% year over year in the most recent quarter. It is gaining significant market share in the cosmetics and skincare categories. E.l.f. Cosmetics is now the second leading brand in the U.S. after its market share doubled over the last three years.

Moreover, e.l.f. is capitalizing on the growing demand for skincare. It acquired Naturium last year, a popular skincare brand that started in Los Angeles in 2019. It is fueling e.l.f.’s momentum, with the company’s skincare sales growing 32 times faster than competitors across tracked sales channels in the most recent quarter.

E.l.f. Beauty also resonates with customers outside the U.S. It is now the No. 4 brand in the U.K., up from No. 8 a year ago. It’s also building brand awareness in Canada, where it is now No. 4 in the market, up from No. 6.

The brand’s success is rooted in offering products at competitive prices that many customers believe are superior in quality to high-end competitors. This brand is disrupting the $100 billion beauty industry and could still deliver tremendous wealth to shareholders from here.

The stock is trading at a forward price-to-earnings (P/E) ratio of 44, which is typical for a fast-growing consumer goods brand. With massive international expansion potential, not to mention margin expansion that could drive high earnings growth in the coming years, the stock could easily double in value within the next five years to outpace the S&P 500.

2. Dutch Bros

Dutch Bros (NYSE: BROS) is a fast-growing beverage chain offering everything from coffees to sparkling sodas, in addition to smoothies and energy drinks. It started in 1992, and since the company’s initial public offering (IPO) in 2021, it’s been rapidly expanding across the U.S.

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Dutch Bros has nearly doubled its shop base over the last three years to 912. Except for a few weak quarters over the last few years, the company’s total revenue has increased 30% or better each quarter since 2021. In the second quarter of this year, it reported the same 30% growth in revenue, with same-shop sales up 4% year over year.

The reason the stock hasn’t taken off can be attributed to a high valuation at the time of the IPO, along with the recent low growth from existing stores. Same-shop sales have been mostly in the low- to mid-single-digit range over the last 18 months. Moreover, the company’s meager net profit, which is hovering just above breakeven, leaves some investors looking for better margins.

One important indicator that is overlooked is the company’s shop contribution margin (or what remains after subtracting variable costs from sales). This measure inched up to 30.8% last quarter, which is on par with world-class restaurants like Chipotle Mexican Grill. This indicates that as Dutch Bros scales the business and grows revenue, it will be a very profitable business.

The stock’s low price-to-sales (P/S) ratio of 2.4 is fair for a company that is operating just above breakeven but growing revenue faster than industry leaders like Starbucks. As Dutch Bros continues to expand toward its long-term goal of 4,000 shops, the stock should continue to trade around the same P/S multiple, if not earn a higher valuation.

All said, the share price should appreciate along with the company’s revenue increase. With massive potential for the business, the stock should easily outpace the return of the broader market over the next five years and beyond.

3. Lululemon Athletica

Lululemon Athletica (NASDAQ: LULU) has been a fast-growing brand in the athletic wear industry over the last 20-plus years. It’s in a sweet spot for investors — it has already established itself as a major brand in the industry but is still small enough to deliver market-beating returns, especially at these discounted share prices.

The stock collapsed this year over slowing growth, which many retail companies are reporting right now. Despite Lululemon’s relatively solid revenue growth of 10% year over year last quarter, the stock is down 50% year to date and is trading at its cheapest P/E in years.

Most telling about Lululemon’s potential is the stellar 35% year-over-year increase in international revenue last quarter. Last year, international sales made up just 21% of the business, but management sees that growing to 50% over the long term.

Moreover, Lululemon continues to grow its men’s business, which is a big deal, considering that the brand has historically been more identified as a women’s brand. Women’s products make up two thirds of Lululemon’s business, but sales in men’s categories grew 15% year over year last quarter, which speaks to the brand’s potential.

Lululemon is also benefiting from powerful industry tailwinds, such as athleisure, that have been in place for years now. The athletic wear industry is expected to reach $293 billion by 2030, according to Statista. The industry has been growing for decades, and Lululemon will almost certainly continue to grow with it.

The stock is a steal at its current valuation. Lululemon can still grow its earnings at double-digit rates over the next decade from double-digit revenue growth and margin expansion. It averaged 20% annualized earnings growth over the last 10 years. There’s a good chance investors can more than double their money over the next five years from a combination of earnings growth and an increase in the stock’s P/E multiple.

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John Ballard has positions in Dutch Bros. The Motley Fool has positions in and recommends Chipotle Mexican Grill, Lululemon Athletica, Starbucks, and e.l.f. Beauty. The Motley Fool recommends Dutch Bros and recommends the following options: short September 2024 $52 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.

3 Stocks That Can Crush the S&P 500 Over the Next Five Years was originally published by The Motley Fool