As 2022 has so cruelly reminded us, the market doesn't always go up. Falling stocks are never fun for long-term investors, but they can create opportunities when strong companies become available at bargain prices. Thanks to a market that is still down somewhere in the neighborhood of 20% from its highs, such deals may finally be coming available.
With that in mind, we asked three experienced investors to pick companies that they view as absolute bargain stocks to consider buying and holding. They picked SoFi Technologies (SOFI 0.26%), Home Depot (HD -1.77%), and Kinder Morgan (KMI 0.27%). Read on to find out why and decide for yourself if any of them represent bargains you're willing to invest in and hold for the long haul.
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A financial suite with sweet potential
Eric Volkman (SoFi): My pick is a fine company whose stock has lost nearly two-thirds of its value since the start of the year -- SoFi.
The once red-hot fintech sector has cooled considerably in recent months, on fears of an economic slowdown and its potential effects on the industry. To some extent that's understandable, but SoFi is a business well positioned to plow ahead even if the economy is sputtering.
That's because the company continues to relentlessly expand its slate of offerings, bringing it closer to being a convenient, one-stop money management shop for nearly any type of client. One very powerful advancement SoFi made at the start of this year was the securing of government approval to operate as a national bank.
At a stroke, running a "proper" banking operation draws in new customers attracted by relatively high interest rates, and provides the company with a nice source of low-cost financing in the form of deposits. And as a company with a constantly growing menu of financial products and services, SoFi can cross-sell a myriad of offerings to these depositors.
The company remains loss-making, but like many a successful tech-flavored highflier before it, SoFi is narrowing its losses while still producing impressive revenue gains. In its most recently reported quarter, the company's 50% year-over-year growth in non-GAAP (adjusted) net revenue convincingly topped analyst estimates. That growth train is expected to continue rolling; management is guiding for similar growth in the second half of this year.
Near-term headwinds have turned Home Depot's stock into a bargain
Parkev Tatevosian (Home Depot): One of my favorite bargain stocks to buy now is Home Depot. The home improvement retailer thrived at the pandemic's onset when folks spent more time at home and wanted to upgrade their living arrangements. However, economies have reopened, and people are spending more time away from home. That's lessened the demand for home improvement projects.
HD PE Ratio data by YCharts
As a result, Home Depot's stock has been in a bit of a funk. That's an excellent opportunity for long-term investors to scoop up shares of this top performer at a lower valuation. Indeed, Home Depot is trading at a price-to-earnings ratio of 17.8. Barring the brief moments immediately following the pandemic's start, investors have been able to buy Home Depot stock at the cheapest it's been in the last decade.
Sure, Home Depot's sales and profits have fluctuated in recent years -- mostly upward. Still, Home Depot's results are impressive even when you look back 10 years. In that time, Home Depot has increased revenue at a compound annual rate of 7.9%. Simultaneously, it increased earnings per share at a compound annual rate of 20.9%. So, investors have this opportunity to buy Home Depot, which has proven its ability to grow sales and profits, as shown above, at its lowest price in the last decade. Unsurprisingly, it's one of my favorite bargains in the market today.
A stalwart in an underappreciated though critical industry
Chuck Saletta (Kinder Morgan): Although there's lots of talk about shifting away from fossil fuels, the reality is that there will likely be a need for oil and natural gas for decades to come. Indeed, even as the U.S. Energy Information Agency projects an aggressive uptick in the use of renewables, it still expects an increase in annual demand for oil and natural gas between now and 2050.
All that energy needs to move from where it's produced to where it's processed and ultimately consumed. Pipelines are generally among the safest and most economical ways to do that. That combination of facts bodes well for Kinder Morgan, which runs around 83,000 miles of pipelines in its North American network.
In addition to that strong reason to believe its services will remain in demand for decades to come, Kinder Morgan has a very predictable revenue stream. Sixty-three percent of its revenue comes from "take or pay" contracts, 25% is fee-based, and 6% of it is hedged. That leaves only 6% exposed to commodity pricing, which means it has a very good handle on what it will get for its efforts. That's an island of calmness in the typically volatile energy business, which is known for its routine boom and bust cycles.
That predictability makes it a somewhat boring investment, which is reflected in a stock price that trades at around 15 times its expected earnings. Still, that predictability also means that Kinder Morgan can afford to pay a generous dividend, which currently sits around a whopping 6.1% yield. A reasonable valuation plus a healthy dividend adds up to exactly the type of company that investors may very well be buying and holding for the long term.
Sometimes, boring is good
While SoFi, Home Depot, and Kinder Morgan may not come across as the most exciting businesses in the world, they each have characteristics that make them potential bargains today that could be worth holding for the long haul. The thing about stock bargains, though, is that the market rarely leaves companies cheap for long. So if you're interested, now is a great time to start investigating these businesses to see for yourself if they deserve a spot in your portfolio.
