It can be tough to gauge the current stock market. Growth stocks have come down massively from their highs, energy stocks have sought a return to glory, and defensive stocks are again in vogue. Inflation is soaring to levels not seen in 40 years and has proven to be much more than transitory. The geopolitical situation adds another unpredictable stressor to investors' minds.
Despite all this news, the Dow Jones Industrial Average remains above 34,000, and the Nasdaq is hovering around the 14,000 level for now. And while short-term swings are unpredictable, these three companies are set up for long-term success.
O'Reilly Automotive
Perhaps the most significant economic factor currently is inflation. The rate reached 8.5% year over year in March although there were a few small, positive indicators. Fuel and food costs predictably continued to rise while used vehicles saw a slight decrease. Inflation could have positive and negative effects on O'Reilly Automotive (ORLY -0.04%), but the long-term outlook is solidly positive.
New and used vehicle prices have skyrocketed over the last year. While used car prices receded in March, the damage has likely already been done. New cars ballooned in value because of the semiconductor shortage, which slammed the used car market, as shown in the chart below.
US Consumer Price Index: New and Used Motor Vehicles data by YCharts
Many Americans will be pushed to hold on to their current vehicles for as long as they can, and this will be a boon for O'Reilly, which sells parts to professional service providers and do-it-yourself customers.
O'Reilly is already seeing signs of this positive trend with comparable same-store sales rising 13% in 2021 and expected to rise another 5% to 7% in 2022. Overall sales increased 15% in 2021 to exceed $13.3 billion while diluted earnings per share (EPS) rose a whopping 32%.
O'Reilly also increased the operating margin from 21% in 2020 to 22% in 2021. This is a testament to management and will be critical moving forward. Inflation will mean rising fuel and raw materials costs, which could crimp the bottom line. Savvy cost savings by management will be essential to success.
Perhaps the most compelling reason for shareholders to be optimistic about O'Reilly stock is the incredible stock buyback program. O'Reilly returned $4.6 billion to shareholders through repurchases in 2020 and 2021 combined. This is nearly 10% of the current market cap.
The company approved increased buyback authorizations three times in 2021, so the buybacks should continue in earnest. Even if the share price dips, the company can repurchase more shares for the same investment, increasing EPS and ultimately benefiting long-term shareholders.
Target
When the market is stormy, a solid and growing dividend is a stockholder's safe harbor. Target (TGT -0.19%) has one of the most illustrious track records.
Target has paid a cash dividend to shareholders every year since 1967. That's right, Target has been consistently returning capital to shareholders since before astronauts landed on the moon. The dividend has been paid during numerous market crashes, periods of inflation, and recessions. The most recent dividend increase also gave shareholders a 32% raise.
Target had a tremendous 2021 and continues to make inroads with digital sales. 2021 saw the company make all-time highs in EPS on a 35% increase in sales since 2019. The company reported double-digit growth in all five of its core product categories.
Image source: Getty Images.
Digital sales now account for 19% of Target's total sales. Target has an advantage over other e-commerce retailers, such as Amazon (AMZN 0.58%), because existing stores fulfill 95% of online orders. Target enjoys cost savings by efficiently utilizing existing assets to fill orders.
Target expects high single-digit, long-term, adjusted EPS growth -- which means shareholders can likely count on the stable and growing dividend for years to come.
Red Rock Resorts
Red Rock Resorts (RRR 0.51%) was busy planning for the future even while the gaming industry faced the bleak 2020 situation. Through its namesake resort and subsidiary, Station Casinos, Red Rock caters to the Las Vegas locals gaming market. Many may be surprised to learn that the Las Vegas locals market is the second-largest marketplace in the U.S. by revenue, only behind the Las Vegas Strip and ahead of New Jersey.
This is a highly desirable market. Las Vegas is the third-fastest-growing metro area in the county, average earnings are on the rise, and retirees make up 20% of the population. This is likely to increase as Nevada has no state income tax, which is an attractive draw for retirees. With 19 properties spread throughout the Las Vegas Valley, 90% of the population lives within five miles of a Red Rock-owned casino.
Operating income exploded in 2021 as the company's revenue crushed its 2020 total and blew by 2019 numbers as well.
RRR Operating Income (Annual) data by YCharts
Another plus is that management is shareholder-friendly. The company declared a special $3-per-share dividend in November 2021, a nearly 6% yield at the time. The company has also broken ground on a new development in the thriving and underserved southwest Las Vegas area. Expected to open within two years, this has the makings of a successful addition to Red Rock's portfolio.
