Both market dips and extended downturns give investors a chance to get into stocks that may have previously felt too pricey to buy. Over the past year, many such opportunities have been provided. Investors should think of those opportunities as though their favorite store has a sale.
Right now, there are three stocks that have dropped sharply from recent highs that can provide investors with a diverse mix while owning investor-friendly, solid businesses. One offers immediate diversification with proven management that can be trusted. Two others are great businesses in different retail segments that provide reliable income and plenty of future potential for shareholders.
1. Berkshire Hathaway
Warren Buffett's Berkshire Hathaway (BRK.A -0.30%) (BRK.B -0.26%) doesn't just give an investor exposure to sectors ranging from industrial manufacturing and energy generation to insurance and various equity investments. Buffett also uses its massive cash-flow generation to buy back his own shares.
In fact, Berkshire has bought more of its own stock in recent years than any other company. But some of those share repurchases are paid for with dividends earned from Berkshire's meaningful stakes in a diverse set of successful companies, some of which are shown below.
| Metric | Apple | Chevron | American Express | Coca-Cola | Bank of America |
|---|---|---|---|---|---|
| Approximate percentage of company owned | 5.5 | 8.2 | 20 | 9.2 | 12.5 |
Data source: Berkshire Hathaway 13-F filing dated Aug. 15, 2022 and company 10-Q filings.
But there are plenty of reasons to invest in Berkshire just for its own operating business, too. The company reported a 39% year-over-year jump in operating earnings in the second quarter. It's trading at a price-to-book value (P/B) ratio of about 1.4. While that level is close to a long-term average for the shares, the stock traded with a P/B as high as 1.6 earlier this year, and it is trading at 1.3 times forward book value based on expectations for the current quarter, according to Barron's.
2. Garmin
Garmin (GRMN 0.17%) is another company trading at a discount to recent levels. Shares in the maker of popular GPS devices used in a multitude of outdoor activities have been down 40% over the last year. That is partly due to the company paring back its revenue growth forecast for 2022. Management now sees revenue relatively flat compared to the prior year, when it initially expected 10% growth. But that comes after a surge in growth over the last several years.
GRMN Revenue (TTM) data by YCharts.
Its valuation, as measured by the price-to-earnings ratio, also has dropped below where it has been trading over much of the past five years. Garmin's sales surged during the peak of the pandemic as consumers moved in droves to embrace outdoor activities, including boating, running, hiking, and camping. While the surge in sales during that pandemic era is now leveling off, the company's sales were on a steadily increasing path prior to that time, too.
The recent flattening of that revenue growth likely represents more of a normalization of its growth rate. Additionally, the company attributed the 7% year-over-year second-quarter decline in sales from its marine segment "primarily due to supply chain constraints that limited our ability to satisfy all demand for our products."
So demand remains strong, and short-term headwinds should abate. Garmin also pays a reliable dividend, which recently yielded 2.75%. That is supported by cash flow as well as a pristine balance sheet with no debt that has $2.9 billion in cash and current and non-current marketable securities as of June 25, 2022. That makes now a good time to buy Garmin, especially after the price has come down from recent highs.
3. Target
Like that of Berkshire Hathaway, the stock of Target (TGT -0.54%) has bounced off recent lows. But it is still down over 20% year to date, as the company warned after its first quarter that margins were going to drop sharply in the near term as it discounted many items to correct a problem with inventory.
Working to manage a difficult supply chain situation, the company built up inventory just as consumer tastes were changing. The company said that it expected its operating margin rate to drop to just 2% in the second quarter. That's compared to an already disappointing 5.3% in the first quarter and 9.8% in the 2021 first quarter.
The actual operating margin turned out worse than expected at just 1.2% when the company recently reported its second-quarter results. But Target said it made important progress with its inventory adjustment plan, and it stuck to its operating margin projection of about 6% for the back half of the year.
Target CFO Michael Fiddelke explained the strategy more clearly, as reported by CNBC. Fiddelke stated, "If we hadn't dealt with our excess inventory head-on, we could have avoided some short-term pain on the profit line, but that would have hampered our longer-term potential. While our quarterly profit took a meaningful step down, our future path is brighter."
Target is a Dividend King that raised its payout another 20% earlier this year. Investors that want to take a longer-term strategy similar to the company itself should take a look at Target stock while it is on sale.
