With the uncertain economic environment and the S&P 500 down 13% from its all-time high set in January, investors are playing it safe by keeping cash on the sidelines. But when things look scary, like they do now, it could be the best time to put money to work in the market. There are still outstanding investments out there if one knows what to seek out.
If I could buy just three stocks this year, they'd be Five Below (FIVE 0.21%), Home Depot (HD -0.16%), and Lululemon (LULU -0.83%). These companies are performing well, and they deserve consideration from investors.
1. Five Below
Selling a broad assortment of goods ranging from clothing and tech gadgets to beauty products and toys, primarily below $5, Five Below has found remarkable success by catering to the discount-focused niche of the broader retail sector. Sales in the latest quarter (ended April 30) increased 7% year over year to $639.6 million. Although this was a huge slowdown from previous quarters, it was still on top of a nearly 200% revenue surge in the year-ago period.
In today's inflationary environment, people are undoubtedly trying to stretch their budgets, a situation that bodes well for Five Below. "History has taught us that consumers will seek out value even more when times are tough," said CEO Joel Anderson on the company's first-quarter 2022 earnings call.
Management recently laid out its long-term outlook, revealing that Five Below still has a ton of growth potential ahead. By 2025, the plan is to double sales and earnings per share (EPS). And by 2030, management hopes to more than triple the store footprint to 3,500, compared to 1,225 as of April 30. At that level of scale, revenue, profit, and most importantly for investors, the share price, are sure to be higher.
2. Home Depot
Next on this list is home-improvement king Home Depot, which posted revenue of $43.8 billion in its fiscal 2022 second quarter, up 6.5% year over year. The business benefited from ongoing strength in both its DIY and professional customer groups, a clear sign that demand for renovation projects remains strong.
Home Depot's latest quarter, which ended on July 31, was impressive not because the business was able to increase same-store sales by 5.4% in the U.S. or that its EPS jumped 11.5% year over year, but because its profitability improved. During the second quarter of 2022, Home Depot's operating margin expanded to 16.5%, the highest in eight quarters.
In the current economic environment, one dominated by soaring inflation, many companies are complaining about rising costs. The fact that Home Depot was able to buck the trend demonstrates the leadership team's adeptness at operating the business efficiently.
Despite the threat of higher interest rates and their potential impact on rising home values, Home Depot's prospects still look bright. The company's $155 billion in trailing 12-month sales represented just 17.2% of what management believes is a gargantuan $900 billion total addressable market. It appears that betting on consumers to continue investing in their housing needs is a safe one. And this should continue lifting Home Depot to new heights in the decade ahead.
The final stock that I'd buy in 2022 is Lululemon Athletica, a burgeoning leader in the competitive apparel industry. During the five-year period from fiscal 2016 through fiscal 2021, the company was able to increase revenue and profit at a compound annual growth rate (CAGR) of 21.7% and 28.1%, respectively. The stock has followed suit, rising 428% over the past five years.
And in the most recent quarter, Lululemon's strong momentum continued, with sales growing 31.6% and net income jumping 31.1% compared to the prior-year period. In the face of economic headwinds and supply chain issues, this performance is outstanding.
While Lululemon rose to popularity thanks to its women's yoga pants, it is now a brand that also caters heavily to male customers. Over the past three years, revenue in the men's segment has posted a CAGR of 30%, greater than the 24% for the women's line. With its foray into footwear, Lululemon hopes to replicate its remarkable success in a new product category.
By fiscal 2026, the leadership team expects annual revenue to double from fiscal 2021 to $12.5 billion. To achieve this, the company will try to double men's and digital sales while quadrupling international revenue. If history is any indication, Lululemon should have no problem accomplishing this goal.