Nothing tests the patience of investors like the market sell-off we have witnessed this year. Year to date, the widely followed S&P 500 index has dropped 19%, while the tech-heavy Nasdaq Composite has fallen 27%.
Bear markets are the ideal time to put money to work in great companies. Read why a team of Motley Fool contributors recently selected Starbucks (SBUX -1.00%), Target (TGT -0.30%), and Home Depot (HD 0.25%) as good places to park some money for the long haul.
Room for improvement
John Ballard (Starbucks): The bear market has pulled Starbucks shares down 34% year to date, but this top consumer brand looks like a solid investment choice at these discounted prices. Earlier this year, founder Howard Schultz returned as CEO, and he sees opportunities to further invest in the business to improve the customer experience and profitability.
Starbucks has enjoyed elevated demand over the last few years since the pandemic hit. After delivering revenue growth between 10% to 15% annually in the five years leading up to the pandemic, Starbucks delivered top-line growth of 24% in fiscal 2021 ending Oct. 3. For the most recent quarter, momentum has continued, with comparable store sales up 7% worldwide helping to drive total revenue up 15% year over year.
The higher demand has caught Starbucks somewhat off guard. The company is behind on upgrading store designs, instead investing in operations, infrastructure, and technology, as Schultz noted on the last earnings call. Investments in the digital ordering experience should significantly improve Starbucks' return potential for investors, since the digital channel already generates higher margins than the company average.
Given the strong brand appeal and its consistent operating performance, Starbucks has generally traded at a premium valuation to most other stocks, so a bear market provides a narrow window to add shares while they are trading at a discount to what the stock typically sells for during a normal market environment. With Schultz's plan calling for an acceleration in new store openings, the stock's current price-to-earnings (P/E) ratio of 21 looks attractive compared to the S&P 500 average P/E of 22.9.
Inventory woes create an excellent buying opportunity
Jennifer Saibil (Target): Target was flying high for most of the pandemic, but its price has plunged since management told investors in the first-quarter earnings report that pressure is building. That was the beginning of a widespread decline in retail stocks as retailers deal with increased costs, supply chain problems, and inflation that's keeping customers away from nonessentials.
Target is now stuck with lots of inventory, some that arrived too late and some that's now off shoppers' buy lists. Target stock is down 36% this year, double the S&P 500 decline. And it's not going to get better very soon. The company is embarking on an inventory correction program, but it will take time to get back on track.
So what's so great about Target? Pretty much everything else. This is a long-term stock with loads of potential.
The company boasts a broad range of shopping options combining physical and digital, and its expertise in this area helped boost sales in the beginning of the pandemic. Its same-day sales services have been especially successful, posting several quarters of triple-digit year-over-year growth, including a 273% increase at its height.
There are several features that make its stores stand out. The curated collection offers high-quality products at a discount, including its owned brands, which attract customers, increase loyalty, and improve margins. Target is also launching many small-format stores, which allow it to penetrate denser areas.
Finally, Target recently became a Dividend King when it raised its dividend for the 50th consecutive year in 2021. The dividend yields 2.9% at this price.
Target shares trade at a low 12 times trailing-12-month earnings, giving investors the opportunity to buy this forever stock at a steep discount.
This home improvement retailer can fix up your wealth in the long run
Parkev Tatevosian (Home Depot): My top discounted growth stock to buy now is a home improvement retailer. Home Depot has grown revenue at a compounded annual rate of 7.9% in the last decade. People's homes are arguably more important now than they have ever been.
Fortunately for potential investors, Home Depot's stock is 31% off its highs as the market is concerned about the headwinds it faces from economic reopening. The company thrived during the early stages of the pandemic, when folks cooped up at home took on home improvement projects at a surprisingly elevated rate. That boosted revenue growth for Home Depot significantly above historical averages.
Nevertheless, Home Depot's business volatility should be short-lived as it recalibrates and reaches a new equilibrium coming out of the pandemic. It was growing revenue briskly before the outbreak and will likely return to the long-run growth rate once it stabilizes. Moreover, Home Depot turned top-line growth into robust earnings that grew at a compounded annual rate of 20.2% in its previous ten years.
The selling in Home Depot's stock has it trading at a price to earnings of 18, near its lowest in the previous five years. This is especially true if you exclude the brief time at the pandemic's onset. A top-performing business selling at a bargain price makes Home Depot an excellent stock to buy now.