There are several approaches to investing, even though the goal is always to make money. Some investors focus on high-growth stocks, even if they're highly valued. Others look for bargain prices that are likely to appreciate.
How do you know if a low price means a fantastic deal, or if it's just a value trap? You need to research the company and see if it has the tools to grow, which include things like a strong moat, cash in the bank, and great management. If it checks out on your list of criteria, and the stock looks undervalued, you've got a bargain on your hands. Target (TGT -0.71%), Lululemon Athletica (LULU 2.64%), and Home Depot (HD 0.22%) look like great deals right now. Let's see why.
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Meeting the needs of today's consumers
Target stock has gained 235% over the past five years, more than double the returns for the S&P 500. It's up 37% this year despite pullbacks from the summer highs, and trades for only 18 times trailing-12-month earnings.
The company posted high growth throughout the pandemic, and as expected, that has started to slow down. But it still posted 9% comps growth in the second quarter (ended July 31), beating last year's big surge. Most of that growth came from stores, and Target's strong omnichannel shopping mix puts it in a great position to score sales both in-store and online. When people were staying home, digital was a growth driver, and now that shoppers are venturing outdoors again, stores are selling.
I think Target's overall mix of shopping options, beyond the digital/in-store framework, is what sets it apart from similar companies. It has had a lot of success with its small-store format, which works for denser, usually urban locations, in addition to its regular large stores. It has partnerships with companies such as Levi Strauss as well as Ulta, which has stores within stores, but its owned brands have also contributed to growth, providing customers with comparable-quality products at a value price. Combined with its large range of shopping options, including its popular same-day services, they give Target an edge.
The company is planning to open 31 new stores total in 2021, in various formats, and at just over 1,900 stores, it has room to open many more.
Target pays a growing dividend that yields 1.52%. At its current valuation, and with its continued growth prospects, Target is a no-brainer stock to own.
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Mainstreaming athleisure
Lululemon has changed activewear. The Vancouver, Canada-based company has contributed to popularizing the athleisure trend, starting with its famous yoga pants and now with its fashion-forward styles and patented fabrics. It's a master business model, offering a premium product at a premium price, with a core product that doesn't change seasonally, but also a collection that can be updated to reflect new styles and technology. The other part of the model, going hand-in-hand with creating a premium brand, is its focus on community, including online and in-store classes.
The company bounced back very quickly after pandemic declines, with revenue increasing 61% year over year in the second quarter (ended June 30), to a record $1.5 billion. Earnings per share increased 140% to $1.59. For the third quarter, Lululemon expects revenue to increase 27% to 30%.
The company bought connected fitness company Mirror last year, and it has plans to have 200 Mirror shops in Lululemon stores by the holiday season, as well as a Mirror e-commerce site. Management sees the Mirror acquisition as a brand-building move, and it complements the company's community aspect with its interactive platform. It's also launching Mirror in its home turf of Canada.
Lululemon stock has gained 580% over the past five years, and while it's not exactly cheap, trading at 61 times trailing-12-month earnings, I would call it a bargain. That's because it's around the cheapest it's ever been according to this metric, and because its growth prospects are still so strong.
Image source: Home Depot.
The home improvement king
Home Depot got a big pandemic boost from people staying at home and spending money on home improvement, and growth has started to slow down as people head back out. But comps remain healthy, growing 8% in the second quarter, and earnings per share increased 12% to $4.53 in the second quarter.
The company began a three-year investment program in its digital channels in 2018, positioning it for strong growth last year. It includes a website upgrade as well as new distribution points and improved delivery options. It signed a deal with Walmart last week to use the megaretailer's vast distribution network for faster delivery, demonstrating that this largest of U.S. home improvement chains has new ways to grow its business.
Home Depot stock is up 27% this year as of this writing, and still trades at a low 24 times trailing-12-month earnings. It also pays a growing dividend that yields 1.91%. With its proven track record and focus on expansion, that makes Home Depot stock a great deal at this price.
