The 2022 bear market pivoted this fall resulting in a nice rally. The S&P 500 index has rebounded from this year's lows that saw it down more than 20% with a double-digit rise since the end of September. But that shouldn't give investors expectations that markets will move consistently higher from here.
When that next pullback occurs, it pays to be prepared. Those are the times to boost investments that can pay off over time. It also makes sense to be ready to buy the dips in a diversified mix of companies. Here are three ideas that would provide diversity and with businesses that have bright futures.
Repricing brings opportunity
Tesla (TSLA -1.59%) shares haven't participated in the recent market rebound. The stock has dropped more than 40% in less than three months. That decline has had less to do with business results than with several other factors.
First, Tesla stock has been richly valued for a long time using traditional metrics like price-to-earnings (P/E) ratios. So the repricing shouldn't be too unexpected. It also comes as investors are concerned that CEO Elon Musk has become distracted by running Twitter and has been alienating potential Tesla customers with some of his public comments. But the decline in shares has brought Tesla stock to an interesting valuation level.
While its P/E remains high, the company has two factories still ramping up production, and management has projected an annual growth rate of around 50% for several years. If it achieves that level of earnings growth as well, it would imply a price-to-earnings-to-growth (PEG) ratio of about 1.0. That level can be a good time to buy growth stocks.
Unlike many growth stocks, Tesla is also generating plenty of cash. It reported $3.3 billion in free cash flow in just the third quarter and more than $6 billion in the first nine months of 2022. The big risk for Tesla, however, is that its growth rate doesn't hold up. Increasing competition and slowing global economies could hit demand for Tesla's vehicles. Buying Tesla after a market pullback would help mitigate that risk.
Lock in some income too
Another opportunity worth taking advantage of when markets drop is with dividend-paying stocks. As long as the underlying business is strong, investors can secure higher dividend yields and still have a market-beating return on invested capital with some stocks. Two that fit that bill and offer further diversity are consumer products company McCormick (MKC -0.48%) and utility and renewable-energy company NextEra Energy (NEE -1.01%).
Spice and flavors maker McCormick has been able to increase its dividend for 37 straight years thanks to its consistent growth. The company is positioned to succeed in various economic environments. McCormick's consumer segment taps into cooking-at-home spending. That typically rises when times are tough and people may be anxious about their finances. But the company's flavor-solutions segment also supplies commercial food-service needs, including by restaurants and entertainment venues.
While consumer-segment sales have dropped 3.3% in the nine months ended Aug. 31, 2022, commercial flavor solutions net revenue jumped 9%. But it was McCormick's consumer sales that drove its growth during fiscal 2020 when pandemic trends drove those sales higher by 10%, while commercial sales declined slightly. That balance helps keep the overall business growing, allowing the company to reliably grow its dividend.
NextEra Energy also offers balance, but in a different way. The company's utility holdings bring in steady and reliable revenue that help provide income for shareholders, while its renewable-energy assets allow for more growth opportunities. It has historically proven it can achieve both.
Since 2006, NextEra has grown earnings at an annual rate of 8.4% while increasing its dividend payout by nearly 10% each year. And it expects to continue 10% annual dividend growth through at least 2024 even as it also invests heavily in clean energy projects. Those include wind, renewable natural gas, solar, and green hydrogen production.
Shares of both McCormick and NextEra have outpaced the S&P 500 index bounce over the last two months. But if those stocks drop during any market retreat, both would make great long-term investments and would nicely balance out a growth stock like Tesla, too.