Various portions of the stock market have now dropped well into correction territory, or even into a full-blown bear market. For long-term investors, that means that shares of some great companies can be bought at discounts. Adding to a portfolio at times like this can create a springboard for long-term gains and wealth creation.
But it doesn't mean stocks can be bought indiscriminately. It does mean, however, that investors can choose a mix of solid, proven names along with some higher-risk growth stocks. Three that fit the bill right now are Home Depot (HD 0.39%), Target (TGT 0.80%), and Tesla (TSLA -3.51%).
New perspective
Retailers like Home Depot and Target thrived during the pandemic as they tapped into what consumers needed at the time. That included not only the company's product offerings, but also the new way customers wanted to do business. That success wasn't by accident or pure luck, however.
Home Depot announced its One Home Depot multi-year investment plan back in late 2017. It included a focus on its digital strategy, which paid huge dividends as e-commerce dominated retail sales at the height of the pandemic. The company also provided the right products as consumers refocused on home repair and remodeling.
Target similarly had success providing home furnishings during that time and used its curbside pickup and Shipt online same-day delivery platform to boost sales. Target acquired Shipt in December 2017 to expand its digital fulfillment efforts and was therefore prepared for the consumer shifts during the pandemic similar to Home Depot.
But investors began to sour on both names this year as pandemic-induced shopping habits have changed. Home Depot shares are down 35% year to date, and Target stock has plunged 40% so far this year. But the businesses aren't permanently damaged. Supply chain disruptions and the changing environment resulted in Target having too much inventory in the wrong categories.
Change brings opportunity
Target lowered its guidance in its first-quarter report on May 18, and shares plummeted as investors decided its tailwinds had come to an end. Three weeks later, management laid out a plan to reset its inventory situation that included promotional markdowns that would impact profitability in the near term. Those reports contributed to much of the 2022 decline in the share price.
But Target also boosted its dividend by 20%, which will result in the Dividend King making 2022 the 51st consecutive year of annual dividend increases. That's a sign of longer-term confidence, and investors would be wise to take note.
The change in investor sentiment has brought the valuations of both Target and Home Depot to multi-year lows. Target's price-to-earnings (P/E) ratio has dropped to 11.5, while Home Depot's P/E is down to a near-decade low of 17.
TGT PE Ratio data by YCharts
Don't ignore growth stocks
While Tesla stock has also dropped sharply -- 38% year to date -- it still can't be considered cheap based on its recent P/E of 88. But as it is a fast-growing leader in a quickly maturing industry, investors are willing to value it higher by traditional metrics.
Even with recent economic headwinds, Tesla is likely to achieve, or at least approach, its 50% growth estimate for vehicle production in 2022. It has two new manufacturing plants that will help with that, and demand remains strong. Tesla has been growing its net income steadily quarter after quarter for the past year.
Data source: Tesla. Chart by author.
Just as importantly, Tesla has been growing profitability in the form of its gross margin. While comparing gross margin between industries isn't typically useful, Tesla has about double the profit margin of traditional automotive companies, and it now approaches margins reported by Home Depot and Target.
TGT Gross Profit Margin data by YCharts
Investors should avoid panic and consider today's market a good chance to add great companies at advantageous prices. The current economic situation also provides a way to diversify a long-term portfolio at the same time. Buying solid companies now will likely help jump-start long-term wealth creation, and investors shouldn't pass up that opportunity.
