The S&P500 is up 25% this year and continues to reach new highs. It is a time of confidence in the economy and excitement in the future. However, it means that it is becoming increasingly difficult to find good deals on the market. As the market rises, valuations start to look inflated.

Warren Buffett recently reiterated his approach to investing, saying he buys great companies at fair prices rather than honest companies at great prices. Investors should take this into account and find those excellent companies that trade at fair prices, rather than focusing on the incredible deal. Over time, your investments in these types of companies can skyrocket.

Think of a coffee chain Dutch Brothers (BRITTLE 2.38%). At the time of writing, Dutch Bros shares are still 36% below their all-time high and are trading at a reasonable valuation. But it’s going everywhere, and now’s the time to buy it.

Coffee that hits the spot

Dutch Bros is still a small coffee shop with 950 stores spread across 18 states, less than half of the states in the US. However, it is opening stores at a rapid pace and has moved from its West Coast base to the southern US. fans in different regions. It opened 38 new stores in the third quarter of 2024 and is on track to open 150 stores in 2024. Longer term, it plans to open 4,000 stores over the next 10 to 15 years.

It offers a different twist on coffee then Starbucks and other coffee chains. It has refined its message over its 30-year history, and its down-to-earth, fun culture, lower prices and focus on speed and service are a hit with its customers.

As a young company in growth mode, it continues to show increased sales every quarter, with the combination of new stores and increasing same-store sales adding to the mix. Nowadays, new stores carry greater weight. The average American is still feeling the impact of inflation in their wallets, and they may not be spending as much on a custom drink. This is evident from the pressure on same-store sales. To the company’s advantage, the lower prices can generate more sales from customers who choose a drink based on price.

In the third quarter, sales increased 28% year-over-year, while same-store sales increased 2.7%. It had the highest same-store transaction growth in two years, as higher prices include price increases. This means more people are buying more often, which is a huge win. Same-store sales increases that come solely from price increases are concerning.

Making the concept work

Investors generally view young growth stocks as risky. If they’re just starting out and aren’t profitable, they might never make it and you could see your money disappear, even though it’s a great concept in theory.

Dutch Bros makes the leap from a great concept to a profitable company. It has reported multiple quarters of profitability under generally accepted accounting principles (GAAP), and profits are growing. It is not only a popular product, but also a money-making product. Naturally, the market will respond positively and the Dutch Bros share has risen by 77% in the past year.

It reported net income of $21.7 million in the third quarter, compared with $13.4 million last year. Adjusted earnings per share (EPS) of $0.16 was well above Wall Street expectations of $0.12.

Besides the implication that Dutch Bros has created a viable business, the improvements in profitability mean that the growth of the business is greater than the capital expenditure required for such a venture. Dutch Bros is growing carefully and ensures that the formula is perfectly implemented in every new store and that new stores are vetted for maximum performance.

It disappointed investors last quarter when it provided an update that new store openings for the full year would be at the lower end of expectations, but that was due to a real estate rating reorganization based on new factors; it wasn’t chasing new store growth at the expense of value creation. The new real estate model is already driving better results, and slower growth in this case means better, more profitable growth. It’s the right way.

You can’t time the market

Dutch Bros shares rose as much as 40% after the report, and continue to do so. At its current price, it trades at a one-year price-to-earnings (P/E) ratio of 87. That’s rich. Is it justified? It also trades at a price-to-sales ratio (P/S) of 3.8, which is reasonable. That is why it is often important to view valuation from different perspectives.

If you can zoom out and imagine where Dutch Bros stock will be in five years, it seems like this is a reasonable price to pay and a good time to buy. Of course, you can wait for a better entry point or market correction. Or you can buy now, relax and enjoy the benefits in a few years.