The stock market has plummeted over the past month as the spread of the coronavirus has crippled numerous industries and begun to leave a widespread impact on the global economy. It's no wonder the S&P 500 Index has fallen about 30% off the highs it set just a few weeks ago.
The nervousness, however, has created a buying opportunity for long-term investors. It requires patience and some nerve, since more stomach-churning days may be on the horizon -- and it requires money you won't need in the next three to five years, to make sure you aren't forced to sell at an inopportune time.
If you're still with me, here are three stocks that offer solid rebound potential.
Image source: Getty images.
A home improvement company
Lowe's (LOW 0.43%) has been beaten up, falling some 49% in a month before rebounding today to 41% down. By way of comparison, the last time Lowe's shares lost half of their value, it took place over a two-year period that started early in 2007.
It is not hard to see why this happened: A recession in the United States -- which represents over 90% of the company's revenue -- will dent Lowe's sales of discretionary goods. After all, an economic slowdown could hurt construction and repair activity and might also lead to fewer home purchases, in turn leading to fewer repairs and upgrades.
But with the stock price down so much in such a short period of time, the market is pricing in a pretty grim outlook. If the downturn is short-lived and economic activity resumes, home sales and major repairs will no doubt ramp up. Even in a longer-term downturn, there's the dividend, which currently yields more than 3%. While we can't take dividend safety for granted these days, the company did announce its regular $0.55 quarterly payout in just the past few days. In the fiscal year that ended Jan. 31, Lowe's generated $4.3 billion in operating cash flow, and after capital expenditures, it had free cash flow of $2.8 billion. This provided plenty of cushion for the company to pay its $1.6 billion in dividends. And Lowe's payout ratio -- which shows a company's dividend payments as a percentage of total earnings -- is usually in the mid-to-upper 30% range.
This home improvement retailer, with $72 billion in annual sales, is one of the two dominant companies in the industry, along with Home Depot. That means, even if the company's sales suffer in the short run, Lowe's should be there to reap the benefits when things return to normal.
Everyone needs coffee
Dunkin' Brands Group (DNKN) is another stock that presents an opportunity in the current environment. Its shares have plummeted by more than 33% in a month's time even after a big rebound as of midday Tuesday.
Traffic to its stores will undoubtedly be hurt by people staying home and practicing social distancing, and Dunkin' Brands is trying to offset this with steps like rearranging the stores and concentrating on delivery and takeout. But, even if people stop buying coffees and sandwiches for a little while, it is hard to imagine they will do so for long.
The company has two brands: Dunkin' and ice cream purveyor Baskin-Robbins, both of which are operated by franchises. In other words, the parent company does not own any of the restaurants; instead, it makes its money primarily from franchise fees, advertising fees, rental income, and license fees from products such as its Dunkin' K-Cup pod for Keurig coffee machines. Right now, Dunkin' has announced that the U.S. restaurants will have reduced hours and there is no eat-in dining, which limits orders to drive-through and take out. You can also have it delivered. This will certainly hurt the franchisees' revenue, especially if more drastic steps are needed to further restrict people's movements. In turn, this will dent Dunkin' Brands' top line. However, while some of its revenue is based on the level of the franchisee's sales, there are other sources, such as rentals, that are relatively stable.
This stock also offers a nice dividend, equating to a roughly 4% yield. Last year, Dunkin's free cash flow was about $261 million, providing plenty of cushion for its $124 million in dividend payouts. Its payout ratio is currently more than 50%, but with stores remaining open -- albeit at reduced capacity -- I think the dividend is safe right now. As soon as people can go back outside, I think they'll load up on their coffee, and Dunkin' should see a turnaround.
Take a ride
Walt Disney (DIS -0.55%) faces revenue pressure as COVID-19 hurts virtually all of its businesses. The stock price reflects this, having fallen more than 30% lately.
The company's wide-ranging business segments include theme parks, television and cable networks, retail stores, and movie studios. Last year, it added the 21st Century Fox movie studio to its stable, and this year it launched its successful Disney+ streaming service, which features attractive content such as Disney Pixar, Marvel, and Star Wars movies.
With management closing theme parks, suspending cruises, and delaying distribution of content, there will be a negative effect on Disney's results, as it admitted. The length and severity are unclear right now. However, there are so many strong revenue drivers for Disney that should rebound once the pandemic passes and the economy gets back on its feet, no matter when that occurs. For instance, its parks, experiences and products division generated 38% of fiscal 2019 revenue, and they're so popular with so many people that it's likely those fans will come back as soon as they are able to plan destination trips again. Disney's studio entertainment business should also recover once people are allowed back outside and start visiting the movies. Media networks' ESPN is feeling an impact due to the cancellation of live sports, but even if the economy doesn't rebound quickly, people will no doubt find refuge in watching sports as soon as the various pro leagues resume play.
These three companies are affected by the coronavirus. However, each has a strong business that will allow it to get through these tough times and recover strongly. When it does, owning shares should prove beneficial to you.
