For most investors, it's no fun watching a volatile stock market sink stocks and lower prices. But sometimes what's good for the markets and what's fun aren't in sync. Markets need corrections on occasion to reset things and start new cycles of growth. The fear and worry in your gut from seeing the red in your portfolio can also be a chance to start a new cycle of growth for your portfolio. All it takes is some stocks being unfairly undervalued by the markets.
Market volatility doesn't discriminate, and some high-quality companies are seeing their stocks trade on the cheap. Here are five to consider adding to your diversified portfolio.
1. Target: A bull's-eye in the retail sector
Target (TGT -0.62%) is one of the leading retailers in the United States. It's endured steep competition from companies like Walmart and Amazon to maintain growth, pay and raise a dividend for 55 consecutive years, and successfully pivot into e-commerce to remain competitive.
Some recent struggles have heavily impacted Target's earnings, including supply chain and freight cost increases and sloppy inventory management. The stock price has fallen 35% since January, and the price-to-earnings ratio (P/E) is now 13, below Target's 10-year median P/E of 15. Assuming the company overcomes these near-term challenges, the current valuation could prove a bargain in hindsight.
2. Starbucks: Take a hot sip of this stock
Starbucks (SBUX -2.11%) is one of the largest coffee chains in the world. The stock crushed the S&P 500 for years as it established more than 32,000 stores. Investors have enjoyed substantial capital gains and a dividend that management's increased 12 years and counting.
But longtime leader Howard Schultz is eventually transitioning out of his role as skipper, and the company's dealing with a growing unionization problem. The uncertainty in this market has turned off investors; the stock price has fallen 30% in 2022. The stock is cheap with a current P/E of 22 that is well below its long-term median of 30. The uncertainty adds risk, but it's hard to overlook the company's strong brand and track record.
3. Don't skip this adtech player
Roku (ROKU 0.68%) is a streaming platform that sells streaming sticks, dongles, and operating software for smart televisions. The company's also become a growing advertising technology, or adtech, business, making money from its ad-supported free streaming service, The Roku Channel. Roku's generating positive free cash flow, which is helping fund investments to continue growing Roku's user base and original content offerings.
Streaming ad spending grew 57% in 2021 as more brands migrated their ad budgets from broadcast television to streaming. The space is highly competitive, and investors have cooled on Roku; the stock's price-to-sales ratio (P/S) has fallen to 4, its lowest since going public. However, nearly half of ad spend on connected TVs currently goes to Roku devices. Roku seems to be an adtech market leader until its market share deteriorates, which makes the stock's 60% price plunge since January a potential opportunity.
4. Walt Disney: The magic of entertainment
Walt Disney (DIS -1.33%) is an entertainment conglomerate and one of the world's most recognizable brands. It's behind many animated classics and superhero movies people know and love. It also operates parks, cruise lines, and growing streaming services like Hulu and Disney+.
COVID-19 hurt Disney, forcing the shutdown of its parks at a time when the company is heavily investing in content to grow its streaming audience. The above chart shows the impact on Disney's free cash flow. However, parks are bouncing back, and the success of streaming should give Disney the ability to monetize it better over time. The stock's fallen to a P/S of 2, nearly its lowest in 10 years. Investors could warm back up to the stock as earnings continue rebounding from a tough couple of years.
5. The Home Depot: Time for some portfolio DIY
The Home Depot (HD -0.16%) is one of the largest home improvement retailers in the world and the market leader in its category in the United States. A home is the largest purchase most people will make in their lives, and upgrades, remodels, and repairs are common. Home Depot's strong brand, network of more than 2,300 stores, and success in integrating e-commerce have kept the business growing. Investors have enjoyed a dividend that's grown for 13 years and running.
Fear over a cooling housing market and potential recession could be driving selling pressure on the stock, which has fallen nearly 30% since January. The stock's valuation is now at a P/E of 19, a discount from its decade median P/E of 22. The consistent investments people make into their homes and substantial market share put a solid floor in the business, creating likely future growth. Investors can buy Home Depot on sale and hold for long-term gains.