Investors always need to consider valuation as well as business potential when deciding whether to invest in a stock. When valuations are in a general decline, as they are right now, it can be a great time to dig in and look for companies that have long-term potential. Smart investors use corrections and bear markets to provide extra juice for future returns.
Technology stocks have led the decline, as their prior gains led to lofty valuation levels. But there have been meaningful drops in all sectors, and investors can use this market decline to add a diverse mix of holdings with solid businesses, despite recent stock declines.
Here are three stocks that have dropped between 25% and 35% this year but offer investors diversity and solid long-term prospects.
Image source: Tesla.
Strong sales growth
A good mix of three such businesses that should continue to have solid future growth are Tesla (TSLA -3.55%), Home Depot (HD 0.02%), and GPS device maker Garmin (GRMN -0.25%). When the biggest knock on a stock is its valuation, a bear market offers a chance to reevaluate whether it belongs in your portfolio.
Heading into this year, Tesla shares returned nearly 3,000% over the prior two and a half years. Home Depot gained about 120% in that time, pushing the valuations of both stocks ahead of the businesses themselves. In some environments, that's OK, and the business results will catch up quickly.
But in the current environment, the stocks started to correct as supply chain challenges, the onset of inflation, and rising interest rates raised questions about business results in the near-term future. But in the longer term, sales growth should continue for these companies.
Tesla believes rising demand, and its two new manufacturing plants that opened this year in Texas and Germany, will help it achieve 50% annual sales growth for several more years. Garmin has been riding a long-term wave of growing interest in outdoor activities. Sales of its popular GPS-enabled products rose 19% in 2021, capping off six straight years of increasing revenue. And Home Depot has also worked to increase its revenue by 50% over the past five years.
HD Revenue (Annual) data by YCharts
Falling to the bottom line
Much of that revenue for all three companies is also reaching the bottom line. Tesla stands out among automakers with an impressive operating margin of 19.2% in the first quarter. When looked at on a trailing 12-month (TTM) basis, the improvement seems even more impressive, and is more than twice what traditional automakers like General Motors and Ford have been able to achieve over the last several years.
TSLA Operating Margin (TTM) data by YCharts
Garmin's profitability is even more impressive, as it has steadily achieved gross margins approaching 60%, and operating margins have been hovering around 25% over the past two years.
Why invest now?
Whether to invest in these businesses now still should be determined by what looks to come ahead, not from past performance. But all three look to continue their recent success. Garmin grew revenue 9% in the first quarter, and maintains its estimate for more than a 10% increase for the full year versus 2021. Management also showed its confidence by announcing a newly authorized $300 million share repurchase plan. The share buyback would be the first in four years and complements a reliable dividend that recently yielded 2.6%.
Home Depot initiated a multiyear investment program in 2017 that has helped its digital sales soar. But the One Home Depot plan also now focuses on growing its professionals business. Increasing that customer base helped its average sales ticket grow by 11.4% in the first quarter versus the prior-year period. The company expects that improvement to continue.
Tesla's astounding sales growth doesn't make the stock cheap by traditional valuation metrics. Even after its recent drop, Tesla shares trade at a sky-high price-to-earnings (P/E) ratio of 133 based on 2021 earnings. But if sales continue to soar 50% annually as expected, that will continue to move down. That will take some time, however, and is another reason that these are being looked at as investments for the long haul. That valuation may mean limited upside in Tesla shares for a few years.
But that's how retirement savings should be invested. Many years from now, investments in Tesla, Home Depot, and Garmin made today will likely become important parts of a retirement portfolio.
