When the stock market tumbles, your first reaction is probably to check your portfolio and see how much you've lost. That's natural, but your next step should be to start bargain-hunting through the wreckage.
So far in September, the S&P 500 is down 7.6%, so it's time to go shopping. We asked three Motley Fool contributors what stocks they think are worth buying at these prices. They came back with Dow Chemical (DOW), Danaher (DHR -0.36%), and SolarEdge Technologies (SEDG -2.77%). Here's why.
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A low price and a high yield
John Bromels (Dow Chemical): The market has never liked boring stocks, and chemical and materials company Dow is about as unexciting as they come. The hundred-plus-year-old company merged with rival DuPont in 2017 and was spun off in 2019 with a portfolio of "performance chemicals." Basically, that means Dow doesn't really sell products to consumers, but makes chemicals and materials that are used in other products or processes. Think automotive coatings, packaging for medical supplies, and lubricants for heavy machinery. Try not to yawn.
Dow's products are used in a large number of industries by customers around the globe. That diversification has helped the company during the pandemic. In the second quarter of 2020, for example, sales to shuttered auto manufacturing plants slumped, but increased shipments of home medical equipment and pharmaceuticals helped pick up the slack. Dow still saw a slight revenue decline -- and a much bigger drop in net income -- but its cash flow remained strong. Strong enough, in fact, for the company to pay down $600 million in debt while still fully funding its generous dividend.
That dividend is the big reason Dow looks like a buy after the market sell-off, as its yield has now risen to 6%. Shares look cheap, too, having fallen about 15% year to date. That makes this an excellent time to consider investing in this boring but reliable dividend payer.
A high-quality company to buy in a market sell-off
Lee Samaha (Danaher): Just as a rising tide lifts all boats, a pronounced sell-off in the markets will lead to quality stocks being sold off too. That's the theory and the reality with Danaher. As you can see below, the stock was sold off in the market rout in the spring.
Image source: YCharts.
The interesting thing about Danaher is that its earnings prospects may well be enhanced by the possible reasons behind a future market fall. If a second wave of the pandemic causes more disruption to the economy, then it's a safe bet that Danaher will be a net winner.
The excitement around the company comes from its diagnostics and life sciences equipment segments. The diagnostics segment is currently seeing very strong growth for its COVID-19 test. In addition, the boost coming from instrumentation sales caused by the pandemic is likely to generate new customers and lead to sales of Danaher's other tests in the future.
The life sciences segment's sales suffered as a consequence of non-COVID-19 related research facilities being shut down. However, that's a relatively temporary phenomenon and few people will argue that research into life sciences will be curtailed after the shock of the pandemic. Moreover, the segment has significant growth prospects from the integration of the former GE biopharma business acquired in 2020.
Danaher's valuation is not superficially cheap right now but it's definitely the sort of stock investors should be looking to pick up during any concerted market sell-off.
Amid the darkness of the market dipping lower, this solar stock shines bright
Scott Levine (SolarEdge Technologies): More than doubling the nearly 8% decline of the S&P 500 in September, shares of SolarEdge have tumbled more than 17% lower. While the stock hasn't hit a rock-bottom valuation, it certainly seems more attractive now than it has at other times during 2020. Currently, shares are trading hands at about $184 -- about 20% lower than their 52-week high of $229.
Although investors initially celebrated the company's Q2 2020 earnings report in August, it seems that the blights in the report, paired with the market's downturn, have shaken their resolve. In the second quarter, for example, SolarEdge reported revenue of $332 million, representing a notable quarter-over-quarter decline of 23%, as the company faced challenges from the effects of COVID-19. Similarly, SolarEdge faced margin compression last quarter. Whereas the company reported a gross margin of 34.2% in the fourth quarter of 2019, it subsequently contracted to 32.5% and 31% in the first and second quarters, respectively.
Undeniably, there were clouds hanging on the company's earnings report; however, it shined in other ways. For one, the company reported growth in its generation of operational cash flow from $51 million in Q2 2019 to $59 million in Q2 2020. This helped the company end the quarter with a strong balance sheet, featuring a net cash position of $577.4 million as opposed to the net cash position of $351.6 million that it had at the same time last year -- something that will help the company to weather the still-present COVID-19 headwinds.
While investors may feel unsettled with the market's volatility and find comfort in eschewing growth stocks like SolarEdge, savvy investors have the opportunity to pick up shares of this leading alternative energy stock at a discount. Between the company's leading position as a provider of power optimizers and inverters for the solar market and its expansion into energy storage solutions, there are a lot of reasons to suspect that this stock can power patient investors' portfolios.
