The market's been going up and down over the past few months, and low prices create compelling buying opportunities. But not all low prices are great buys. Let's go through three beaten-down stocks and see which ones are worth buying. Home Depot (HD -1.86%), Starbucks (SBUX -0.40%) and Lululemon Athletica (LULU -2.35%) are all down around 20% year to date. Should you buy their shares?
Is home improvement coming to a halt?
Home Depot has been demonstrating outstanding growth over the past two years, coinciding with lockdowns and a focus on the home. While much of that is over, and shoppers are spending on other products, Home Depot has continued to post increased sales and income.
Image source: Home Depot.
Revenue increased 11% year over year in the fourth quarter, on top of last year's 25% increase. Net income increased from $2.9 billion in Q4 2020 to $3.4 billion in 2021. Not only was it a winning performance facing tough comps from the year before, but it was also achieved while facing challenges with the supply chain and increased costs.
However, management isn't expecting these high increases to last forever. It's expecting sales growth to be "slightly positive" in 2022. That might sound disappointing, but after the past two years it's not surprising. If it's staying conservative in its estimation, there's also a stronger chance it will beat guidance instead of coming up short.
In its favor, the housing market continues to be strong, and the "Great Resignation" is bringing about more people buying houses and staying at home. Even if sales growth decelerates in the short term, there are still so many reasons to be confident in Home Depot's long-term future.
Home Depot shares trade at a cheap 21 times trailing-12-month earnings, and the company also pays a dividend that yields 2.2% at the current price. This is a blue-chip stock that should reward shareholders for many years to come, and this is an opportunity to buy on the dip.
Coffee culture remains robust
Starbucks was revolutionary when it started out, creating a huge chain of coffee shops that customize the humble cup of coffee. This has led to a coffee empire, with more than 34,000 global restaurants and a dominant position in an industry that didn't exist before it opened.
The past two years haven't been easy for the coffee king, but in some ways, investors were able to gauge its strength by how well it performed despite challenges. It has maintained a healthy cash position throughout, and stepped up operations to feed customers when dining rooms closed. It has emerged a more efficient, digitally focused company with a robust loyalty program and a plan to reach 55,000 stores by 2030. That could well place it as the largest restaurant company in the world by store count.
In its 2022 first fiscal quarter (ended Jan. 2), revenue increased 19% year over year to $8.1 billion, rounding out a complete rebound from pandemic declines. Earnings per share (EPS) increased 30% to $0.69. However, new closures in some of its regions mean that the process is not yet over, and the company still faces challenges in this area. That's not to mention the global supply-chain issues, increased costs, and geopolitical turmoil that may affect its operations in other parts of the world.
Starbucks stock trades at the low valuation of 23 times trailing-12-month earnings, and it pays a dividend that yields 2.2% at the current price. Investors shouldn't expect fast growth, but the shares should increase and compound over time, and now is a great time to buy.
Image source: Getty Images.
Growth in activewear continues
Lululemon isn't a new name on the block, but it's still posting high growth and capturing market share. Its stock has gained 400% over the past five years, widely outperforming the benchmark S&P 500.
The company has several features that set it apart from other activewear brands and drive sales. One is its patented fabrics, which it consistently upgrades to match technological standards for fitness products. This is a strong selling point for its customer base of fitness-focused folks.
Second, it has created a community of shoppers that it feeds with its direct-to-consumer model, including live support from "digital educators," in-store yoga classes, and a full range of omnichannel shopping options. The omnichannel piece is a huge part of the model, and digital accounted for 40% of sales in the third quarter.
The company believes it still has a long runway for growth. CEO Calvin McDonald said, "We are in the early innings of our growth, as we continue to expand across geographies, categories, and channels." In the third fiscal quarter (ended Oct. 31, 2021), revenue increased 30% year over year to $1.5 billion as it accelerated its pandemic rebound. EPS increased from $1.10 last year to $1.44 this year. Lululemon reports fourth-quarter earnings next week.
Shares trade at 47 times trailing-12-month earnings, which isn't cheap, but it's fairly low for this growth stock. Lululemon has a winning strategy and is planning to launch new products that appeal to its loyal customers. Investors should expect growth from this athleisure giant, and a lower price makes it an even more compelling buy.
