A stock that's dropped in the double digits may set off an alarm bell for you. But in many cases, that ringing should instead signal opportunity. Today, many companies with solid track records and great future prospects have lost ground, as concerns about the economy weigh on investor sentiment.
Though these stocks are suffering today, many could deliver significant gains over time. So, instead of fleeing beaten-down stocks, it's a good idea to examine them closely. Here are three that make great buys right now. They've each dropped more than 20% this year.
1. Home Depot
Home Depot (HD 2.47%) shares have declined even as the company defies today's difficult economic situation. The world's biggest home improvement retailer actually delivered its highest quarterly sales and earnings ever in the second quarter. Sales climbed 6.5% to $43.8 billion, and net earnings reached $5.2 billion.
Home Depot noted growth in sales to both professionals and the do-it-yourself crowd. The project pipeline and demand for home repair supplies remain strong, the company says. It's always possible some of this could weaken if economic difficulties persist. But Home Depot's general strength is reason to be optimistic about this company over the long term.
Home Depot has a solid track record of success when it comes to revenue and profit.
And the important financial measures of free cash flow and return on invested capital have generally climbed over the years. These metrics are key because they show a company has money to invest in its business -- and has used its money wisely.
HD Free Cash Flow data by YCharts
Today, Home Depot continues to invest in its service to professionals. It recently launched features on its business-to-business website to improve the shopping and quoting experience. These efforts should keep Home Depot ahead over the long term.
2. Starbucks
Starbucks (SBUX 0.21%) has many strengths. One of them is the loyalty of its customers. The coffee chain giant's membership program drives more than half of revenue in U.S. company-operated stores. And the great news is this population is growing.
In the most recent quarter -- the fiscal third quarter -- U.S. active Starbucks Rewards membership climbed 13% to 27.4 million members. Starbucks reported another important figure: Consolidated net revenue increased 9% to $8.2 billion. That's a quarterly record.
The company faces headwinds of coronavirus restrictions in China -- its second-biggest market after the U.S. But Starbucks has worked to make its business as flexible in possible in China so that it can immediately benefit as stores reopen. The company now operates 5,761 shops in China and plans to grow that to 6,000 by the end of the year.
Meanwhile, Starbucks may be entering a new phase of growth. Longtime Starbucks leader and interim CEO Howard Schultz is ushering in Laxman Narasimhan as the new CEO. Schultz will guide Narasimhan through next year. At the same time, Starbucks is launching a "reinvention" plan -- some features include new bar configurations, a focus on customized drinks, and new models for ordering digitally.
With shares trading at about 30 times forward earnings estimates -- compared to more than 40 at the start of the year -- now is a great time to bet on Starbucks' next chapter.
3. Abbott Laboratories
Diversification is a big part of Abbott Laboratories' (ABT 0.51%) success story. The company has four businesses: diagnostics, medical devices, nutrition, and established pharmaceuticals.
Since the early days of the pandemic, diagnostics has become its biggest business. That's thanks to Abbott's multitude of coronavirus tests. In the second quarter, coronavirus testing brought in $2.3 billion. And the company predicts total coronavirus testing sales for the year of about $6.1 billion.
But Abbott doesn't just rely on the testing business. Historically, medical devices have been the biggest contributor to revenue. The company sells devices in a variety of cardiovascular specialties and has a leading diabetes care business.
One of Abbott's star products is the FreeStyle Libre continuous glucose monitoring system. That product alone brought in $1.1 billion in revenue during the quarter. The company recently won U.S. regulatory clearance for the FreeStyle Libre 3 system. This updated version of the popular product could drive more revenue gains down the road.
Abbott has increased profit and revenue over the years, and Abbott continues to innovate and win new product approvals. So even if coronavirus testing revenue wanes, overall growth prospects are bright. Abbott also is known for raising its dividend. It's part of an exclusive group known as Dividend Kings.
Abbott shares trade at about 20 times forward earnings estimates. Earlier this year, they traded closer to 30. Today, Abbott is looking cheap considering the total package it offers long-term investors.
