While major indices have started to show evidence of a potential rebound in recent trading days, the market is still down substantially year to date. The S&P 500, for instance, is down about 9% so far this year. Meanwhile, the Nasdaq Composite has fallen about 15%. With major indices beaten down so significantly, it's a good time for investors to go shopping.
A close examination of potential investments reveals that even some of the highest-quality names in tech have gone on sale. Market leaders Apple (AAPL 0.71%) and Netflix (NFLX -1.05%) are two great examples of high-quality companies that are worth considering taking stakes in while shares are trading at lower valuations.
Here's why these two stocks could be a good fit for your portfolio.
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Apple
iPhone-maker Apple (AAPL 0.71%) has seen its price-to-earnings ratio fall from 34 to 26 over the last year and from 29 to 26 in 2022 alone, as its shares have pulled back. This is almost entirely due to broader-market sentiment -- not the company's business performance. After all, Apple's fiscal first-quarter revenue and earnings per share, which grew 11% and 25%, respectively, both crushed analysts' estimates.
Further, Apple chief financial officer Luca Maestri said in the company's fiscal first-quarter earnings call that management expects "solid year-over-year revenue growth" during the current period with a fiscal first-quarter record top line. And this expectation comes despite anticipated "significant supply constraints."
The anticipation for any growth during the current period is quite notable, considering the year-ago comparison the company is up against: Revenue soared 54% year over year in the second quarter of fiscal 2021.
While a price-to-earnings ratio of 26 for the tech giant may not seem cheap, the top-notch quality of Apple's operations deserves a premium valuation. Consider that Apple's trailing-12-month free cash flow is a whopping $102 billion. Further, the company pays a small but growing dividend and is repurchasing its shares in droves. Apple's share count has been reduced by 22% over the past five years.
Netflix
Netflix, meanwhile, trades at a price-to-earnings ratio of 32, down from 53 at the beginning of the year. While investors have been concerned with the company's decelerating revenue growth, the streaming-service company is still a growth stock. Fourth-quarter revenue rose 16% year over year.
Further, management expects its operating margin to continue expanding nicely over the long haul (albeit with some year-to-year volatility). "There is no change to our goal of steadily growing our operating margin at an average increase of three percentage points per year over any few year period," said Netflix management in the company's fourth-quarter letter to shareholders when discussing its outlook.
Management's guidance for a further deceleration in the first quarter of 2022 and a temporary setback in its operating margin this year relative to 2021 may be spooking some investors. But it's also part of the reason for the significant drop in the stock's valuation -- and today's compelling buying opportunity for patient investors.
It's also worth noting that Netflix could, at any point in time, open its business up to a massive new revenue stream: digital advertising. The company currently has only subscription-only plans. But it's always possible that management changes course and unlocks a substantial new business opportunity in advertising by giving consumers an ad-supported tier to consider.
No investment is without risk, including these two market leaders. But these two stocks' recent sell-offs have certainly increased the odds of a potentially lucrative long-term return for investors who buy shares of these companies today.
