It's been a tough year for the markets so far, but the world has seen inflation and war before. These uncertainties haven't prevented investing greats like Warren Buffett from building wealth through the stock market over decades.
A great way to navigate 2022 might be to borrow some tips from the billionaire investor, including investing in entrenched businesses at value prices. Here are two reasonably valued consumer brands that can help your portfolio get through 2022 and that I would be comfortable buying today.
Starbucks' (SBUX 0.62%) stock price is down 34% from its recent highs, but that price drop is certainly not due to a lack of growth. In the fiscal 2022 first quarter (which ended Jan. 2), the coffee chain enjoyed revenue growth of 19% over the year-ago quarter. Moreover, founder Howard Schultz is back in the driver's seat as CEO, which is not a bad thing, given Schultz's background growing the company into the brand it is today.
But the market is concerned about inflationary costs and their impact on Starbucks' near-term profitability. Plus, there is a staffing cloud hanging over the company as some employees move to unionize. These uncertainties are weighing on the stock's performance.
So why should you buy the stock now? Because Starbucks doesn't trade this cheap very often. The stock's price-to-sales (P/S) ratio is currently hovering just above 3. Starbucks has only traded at this P/S ratio level three other times in the last 10 years.
Because of its strong brand, Starbucks can raise prices to offset some of the inflationary costs, as it plans to do. Management also plans to exercise greater spending discipline to keep margins firm.
Investors should feel confident to step up to the plate here, because demand for Starbucks is still healthy, as supported by stellar revenue performance during the last quarter. The stock is a better value at these levels, and while investors wait, they can earn an above-average dividend yield of 2.3%.
Kroger's (KR -0.11%) stock price is up 35% year to date. With this kind of stock performance, it seems odd that the stock is on sale, but considering its price-to-earnings (P/E) ratio relative to the S&P 500 index, Kroger looks undervalued. The stock currently trades for 16 times projected earnings this year, which is below the index's forward P/E of 19.4. The grocery chain could earn a higher valuation and boost its return to investors in the near term.
Kroger is taking the inflationary headwinds in stride. It reported growth in identical sales (without fuel) of 14.3% on a two-year annualized basis in fiscal 2021 (which ended in January). Digital sales are booming, more than doubling over the same period. Kroger's ability to serve customers no matter how they shop is a huge advantage. Management expects to double digital sales and profitability by 2023.
Most importantly, Kroger is performing where it counts. Adjusted earnings per share rose 12% year over year in the fiscal 2021 fourth quarter, and the company could deliver further growth in profits in fiscal 2022. "One of Kroger's greatest strengths is our ability to successfully navigate many different operating environments, and our team is doing an excellent job managing the current higher inflationary environment," CEO Rodney McMullen said during the fourth-quarter earnings call.
The stock's discounted P/E to the S&P 500 on top of strong operating results makes it a compelling value right now.
Remember, just because a stock is on sale doesn't mean the stock can't go lower in the near term. But as Warren Buffett's career has demonstrated, if you buy solid companies at reasonable valuations, and hold through near-term volatility, you're going to earn satisfactory returns over the long term.