Concerns regarding high inflation, the omicron variant, and rising interest rates have dampened Wall Street's appetite for risk, and the S&P 500 has fallen 10% from its high. But that figure doesn't tell the whole story. Many high-quality stocks have fallen much farther. For instance, Netflix (NFLX 4.17%) and Sherwin-Williams (SHW -2.23%) have seen their share prices drop 44% and 20%, respectively.
Of course, losing money is never pleasant, but there is a silver lining here. All of Wall Street's worries are temporary in nature, and market corrections have historically been a great time to buy stocks. To that end, Netflix and Sherwin-Williams benefit from a strong competitive position, and both look like smart long-term investments.
Here's what you should know.
Image source: Getty Images.
1. Netflix
Streaming pioneer Netflix is still a titan in the industry. Despite on onslaught of competition, the company has retained its market-leading position, both in terms of subscribers and revenue. More importantly, in 2021, Netflix captured 47% market share in terms of global demand for original content, while Amazon Prime Video ranked second with 12% market share, according to Parrot Analytics.
That's particularly important, because a bigger subscriber base and greater demand means Netflix has more viewer data than its rivals. Using that information, the company leans on artificial intelligence to make relevant suggestions and inform its content production decisions, creating a virtuous cycle that should help the company better engage its viewers over time.
Despite tough year-over-year comparisons, Netflix delivered a solid financial performance in 2021. Paid members grew 9% to 221.8 million, and the average monthly revenue per membership jumped 7% to $11.67. In turn, sales rose 19% to $29.7 billion, and earnings skyrocketed 85% to $11.24 per diluted share.
As a caveat, Netflix generated negative free cash flow of $158.9 million over the last 12 months, a significant drop from $1.9 billion in positive free cash flow the year before. Not surprisingly, an uptick in content spend was to blame, but management believes the situation is transitory, noting that the company would be free cash flow positive in 2022 and beyond.
On that note, Netflix has plenty of room to grow in the years ahead. Pay TV households in the U.S. still outnumber non-pay TV households, but that's expected to change by 2024, according to eMarketer. And as cord cutting continues, consumers will naturally turn to high-quality streaming content. Netflix fits that bill perfectly.
Moreover, Netflix stock currently trades at 5.9 times sales -- that's significantly lower than the five-year average of 9.1 times sales. In fact, Netflix's price-to-sales ratio hasn't been this low since 2016. That's why now looks like a good time to add a few shares to your portfolio.
2. Sherwin-Williams
Sherwin-Williams specializes in paints, coatings, and related supplies. The company primarily generates revenue through its direct-to-consumer (DTC) stores, which serve both professional contractors and do-it-yourself customers. However, it also distributes products to retail partners like Lowe's and Walmart through its consumer brands segment, and it supplies industrial coatings to manufacturers through its performance coatings segment.
One of Sherwin-Williams' greatest assets is its brand authority. Not only is the company synonymous with paints, but its portfolio includes several other recognizable brands like Valspar, HGTV Home, and Thompson's WaterSeal. And its massive network of retail and logistics infrastructure -- over 4,770 DTC stores and 137 manufacturing and distribution facilities -- serves to reinforce its strong competitive position. In turn, Sherwin-Williams' brand image and vertically integrated business model have helped it become the global leader in paints and coatings. The company held 12.5% market share in 2020, while PPG Industries ranked second with 9.4%.
Last year, Sherwin-Williams delivered a mixed financial performance. Revenue rose a reasonable 9% to $19.9 billion, but supply chain chaos and inflated raw material prices caused earnings to fall 5% to $6.98 per diluted share. While disappointing in the short term, those pressures are temporary, and the company is well positioned to rebound in 2022. In fact, management's guidance implies 23% growth on the bottom line this year.
Additionally, Sherwin-Williams has tailwinds workings in its favor. Many Gen X, Gen Y, and Gen Z consumers -- a cohort that collectively represents 66% of the U.S. population -- are either entering their home-buying years, upsizing to larger homes, or remodeling their current homes. More broadly, non-residential and residential square footage has consistently trended upward over time. In both cases, those trends should translate into demand for paints and coatings. That's why this stock looks unstoppable in the long run.
