The recent turmoil in the stock market may have started among growth stocks, which slumped in value as investors looked ahead to the interest rate hikes the Federal Reserve will begin implementing this year, but the bearish sentiment has spilled over into other parts of the market, too. Even some stable companies that generate consistent profits and pay reliable dividends have sold off in this market correction.
It's uncomfortable, but volatility like this is completely normal. Investors should treat these temporary setbacks as opportunities to load up on quality businesses at discounted prices. We asked three Fool.com contributors to pick out stocks they view as fitting that description that are currently on sale, and they pointed to Domino's Pizza (DPZ -1.68%), Applied Materials (AMAT -2.34%), and Albemarle (ALB 0.31%).
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Market-beating returns, a long streak of dividend boosts, and pizza. Where do I sign up?
Anders Bylund (Domino's Pizza): This household name may not be the first stock you think of in the context of generous dividend payers. Its effective yield stands at just 1.1%, after all. But that metric doesn't tell the whole story.
Domino's Pizza has increased its payouts every year since 2013, boosting its annual dividend checks more than fivefold in the process. The yield may not be terribly impressive, but that's because Domino's share price skyrocketed by 750% over the same period. It's just hard for a payout to keep pace with stock gains like these.
Domino's success in recent years was built on one of my favorite qualities in a long-term investment: a willingness to change with the times. Faced with terrible customer reviews (its pizza tied for last place with Chuck E Cheese in one infamous example) and flagging sales, in 2009, Domino's set about changing everything about its business. With a new marketing message, revamped recipes for dough, sauce, and topping combinations, and a self-deprecating image, Domino's management righted the sinking ship. Rivals such as Yum! Brands' (YUM 0.46%) Pizza Hut and Papa John's (PZZA 1.87%) can't hold a candle to Domino's when it comes to long-term sales growth.
And that's not the end of the story. More recently, Domino's has been leaning into the market changes engendered by the COVID-19 crisis. Online sales accounted for $6.6 billion in domestic sales last year, up 36% from 2019. Domino's loyalty program boasts 70 million members, and the company is rolling out a new point-of-sale system that helps store managers collect, track, and analyze data about specific orders and market trends. Online orders also tend to be larger than those placed over the phone, so boosting customer engagement with the digital ordering experience is a top priority for the chain nowadays.
So Domino's gives its shareholders a modest yield, but a steadily growing dividend payout, market-beating stock returns, and an open-minded management team with their eye fixed on the long-term horizon. All of this is available to new investors at fire-sale prices after a mildly disappointing and quite forgivable fourth-quarter report. Domino's stock is down 29% year to date and trades at a reasonable 26 times forward earnings. What's not to love?
Semiconductor equipment stocks are selling off despite a red-hot chip market
Billy Duberstein (Applied Materials): At just 0.75%, Applied Materials' dividend yield won't raise too many eyebrows, but there is much more to dividend investing than just yields. Share buybacks, growth prospects, and a low valuation foundation are also key. That's why investors may wish to look at semiconductor equipment stocks, which are getting crushed amid the tech sell-off despite possessing all of these attractive characteristics -- and despite the fact that the world is experiencing a semiconductor shortage.
This all bodes well for semiconductor equipment manufacturers like Applied, the largest and most diversified of them by revenue.
Due to marketwide factors, Applied is down 25% from its recent high and trades at just 17.5 times earnings. That's compared with 31 times earnings for the Nasdaq 100. Yet consider this quote from Applied Materials CEO Gary Dickerson on its most recent conference call:
... our semiconductor systems revenues from the second quarter of 2021 to the end of Q1 2022 and compare to the prior 12-month period, they were up 43% year on year. We think this is a good approximation for industry growth in calendar 2021, which would put WFE [wafer fab equipment] in the mid-$80 billion range. Demand is very strong and continues to grow. We believe wafer fab equipment spending could reach $100 billion in 2022. And since we are already close to being sold out for the year, we also have a positive growth outlook for 2023.
If Dickerson is right, and Applied Materials grows along with a wafer front-end market that reaches $100 billion, Applied's revenue stands to grow about 18% this year and continue growing next year. Due to the operating leverage in its business model and stock buybacks, earnings per share are likely to grow even faster than revenue. So its low P/E ratio doesn't make much sense.
Yes, the industry has traditionally been cyclical. However, with so many foundries announcing ambitious long-term production plans, and considering that Applied has said it's already sold out for the year, that cyclicality doesn't appear to be as much of a risk today. Additionally, management mentioned on the call that its services business was up 14%, with about three-quarters of that revenue coming from recurring subscriptions. Those dollars aren't going to go away if systems revenue falls, because services revenue should grow along with the installed base.
Moreover, management said it didn't see any signs of double-ordering, which it was asked about on the call. It appears the only things that may hold back Applied this year are supply constraints and not being able to meet demand. But those are high-class problems to have.
While the market is skittish right now, it's bidding down solid, well-valued tech businesses along with the marginal ones. Long-term investors should take advantage.
A quality materials producer powering the EV megatrend
Nicholas Rossolillo (Albemarle): Given that it has an annual dividend yield of just 0.9% at current share prices, investors shouldn't get too amped about Albemarle as an income play. But what they can get fired up about is that this is a rare Dividend Aristocrat that produces specialty chemicals -- especially lithium, a key ingredient for electric vehicle batteries.
Lots of new electric vehicle manufacturers have popped up in the last couple of years, thanks in no small part to the incredible success of Tesla (TSLA -1.92%), and legacy automakers are scrambling to electrify their lineups, too. Though there are other battery technologies out there and new ones under development, most EVs today make use of lithium-ion batteries. That tees up Albemarle's leading lithium production operation for significant growth in the years to supply that rapidly expanding market.
In fact, Albemarle is working on getting a couple of new lithium extraction projects up and running in Chile and Australia. Management thinks that in 2022, revenue and adjusted EBITDA will notch year-over-year increases of 31% and 41%, respectively, at the midpoint of its guidance ranges. Based on this estimate (and after a 36% decline from all-time highs), the stock currently trades for 20 times enterprise value to forward adjusted EBITDA, or 30 times forward adjusted earnings per share.
Some forecasts suggest that 40% of all new auto sales will be EVs by the end of this decade. If that's even close to accurate, Albemarle will have no shortage of demand for its lithium. Of course, as is the case for many companies that supply basic materials, this will be a cyclical stock. Its fortunes will ebb and flow as supply and demand dynamics change. But Albemarle is no new kid on the block. It has maintained its streak of annual dividend hikes since 1994, and has consistently generated operating income profit margins in the low-to-mid-teens percentages for years, even as it steadily invests in new chemical production operations.
Basically, if you're looking for a way to bet on the future of automotive technology, consider adding Albemarle to your list of companies to invest in.
