With the S&P 500 index down 15.5% year to date, you don't have to look hard to find stocks trading down significantly from their highs. But while beaten-down stocks may be a dime a dozen these days, backing high-quality businesses should be a top priority, and putting your money behind the right ones will have a huge impact on your long-term returns.
Read on to see why Motley Fool contributors identified these two strong companies as top-tier investment opportunities following big sell-offs.
Take advantage of the pullback on this quality growth stock
Keith Noonan (Airbnb): Like many growth-dependent stocks, Airbnb (ABNB -1.94%) has had a rough go of things in 2022. The company's share price slumped roughly 43% so far in 2022, and it's off roughly 55% from the high it reached in February 2021 despite impressive business performance.
The company's third-quarter earnings report delivered currency-adjusted sales growth of 36% year over year, and net income grew 46% to reach $1.6 billion. The rental specialist managed to beat top- and bottom-line expectations for the quarter, but midpoint guidance calling for 26% year-over-year currency-adjusted sales growth in Q4 underwhelmed the market and shook confidence in the stock. The Q4 sales guidance and comments from management suggest Airbnb is seeing macroeconomic headwinds on the horizon, but the business looks to be in very good shape overall, and the Q3 results highlight the company's impressive ability to flexibly scale in response to industry conditions.
Airbnb posted a net income margin of 42% in the quarter, which was up from 37% in the prior-year period, and the business generated $3.3 billion in free cash flow over the trailing 12-month period on a roughly 40% margin. With a market capitalization of roughly $60 billion, the company is valued at roughly 18 times trailing free cash flow and approximately 31 times this year's expected earnings -- levels that leave the door open for long-term investors to see very impressive returns on the stock.
Airbnb deftly navigated the pandemic, and it's putting up great margins for a company that's still increasing sales at an encouraging clip and has such a long runway for continued expansion. If an economic downturn causes people to shift away from travel spending, growth will be slower in the near term, but the company's asset-light business model and the flexibility of its platform put it in good position to navigate those kinds of challenges.
For investors seeking high-quality growth stocks trading at worthwhile discounts, I think Airbnb is a strong buy at today's prices.
This retailer is down but not out
Jeremy Bowman (Target): Although Target (TGT -0.82%) was a market darling for much of the pandemic, consumer spending has shifted this year, leaving the retailer swimming naked when the tide went out.
Target anticipated that the heady consumer spending of 2021 would continue, but instead of buying TVs and furniture, Americans are shelling out on travel and entertainment, or avoiding discretionary goods as they cope with high inflation.
That's been a problem for Target, whose stock is down roughly 39% from its peak last year, and it's cut its guidance multiple times this year.
However, it's a mistake to think that the challenges facing the company are permanent. Target is gradually paring down its inventory levels, which will help restore profit margins by making markdowns less necessary, and the macroeconomic headwinds it's faced will eventually fade as the economic cycle turns.
Put aside the temporary weakness and Target still looks well prepared to continue to gain market share and grow profits. In fact, even during a difficult third quarter, the retailer said it gained unit share, a measure of market share based on volume sold rather than dollar value, in all five of its core merchandise categories, showing its appeal to consumers.
The company is also executing on another key strategic initiative, growing its owned brands, which bring in higher profit margins than private-label brands and increase customer loyalty. Sales from its owned brands grew twice as fast as the total comps in the third quarter, meaning they were up 5.4%, and Target now does more than $30 billion in annual sales from its owned brands.
Finally, it continues to expand shop-in-store relationships with popular brands like Apple, Disney, and Ulta, and it's growing its brick-and-mortar footprint, adding 17 new stores, including 10 small-format stores, which help drive online sales as well.
Those competitive advantages aren't going away, and Target should continue to gain market share from struggling department store chains and mall-based retailers. While the booming growth of the pandemic was a one-time phenomenon, Target should soon get back to delivering steady, reliable growth with a target of high-single-digit EPS growth and a growing dividend, and the stock should also benefit from multiple expansion once it returns to health.
It may take a few quarters for Target to get back to full strength, but the beaten-down retail stock looks like a good bet to beat the market from here.
