As bad as the 2022 sell-off on the S&P 500 and the Nasdaq Composite has been, there are plenty of companies that are down far worse than the broader indices. Even industry-leading companies like Tesla (TSLA -0.99%) and Stanley Black & Decker (SWK 1.14%) are down over 60% year to date (YTD).
Both companies may have fallen too far. Tesla is starting to look like a good value, while Stanley Black & Decker is a blue-chip dividend stock that is a reliable source of passive income. Here's what makes each company a great buy now.
Image source: Getty Images.
A healthy price drop
Howard Smith (Tesla): The plunge in Tesla's share price this year isn't surprising considering its lofty valuation. But the company is still growing at an astounding rate and bringing in cash at a fast pace. The company will invest that cash to help it continue to grow. But investors have sold the stock in droves in recent months.
Some of that is related to CEO Elon Musk's venture with Twitter, which has pulled him away from Tesla. Another business-related concern is that between growing competition and slowing global economies, the company may fail to achieve its projected growth rate.
Analysts have been reducing Tesla's fourth-quarter vehicle production estimates due to the aforementioned issues, along with COVID-19-related issues in the important Chinese market. But 2022 production volume of nearly 1.4 million vehicles represented an increase of 47% year over year. Something investors need to monitor, however, is that production numbers have outpaced vehicle deliveries over the past two quarterly periods. That could indicate the start of a scenario where Tesla's production capacity is outpacing demand.
Tesla also has been gaining revenue from other areas of its business. The image below shows the various sources of third-quarter revenue. Over 12% of 2022 sales have come from its growing services and energy segments through September.
Image source: The Motley Fool, based on data from Tesla's SEC filings.
With a forward price-to-earnings ratio now below 30, Tesla's valuation can no longer be considered unconventionally high. Headwinds remain, of course, and the stock could still go lower. Investors in Tesla shouldn't be looking at a timeline of just a year or two. But for those investing for the long term, the stock drop makes now a good time to begin accumulating shares.
This high-yield Dividend King is worth buying now
Daniel Foelber (Stanley Black & Decker): I agree with Howard that Tesla looks like a compelling buy for growth investors looking to buy the industry-leading EV company at a historically low valuation.
Stanley Black & Decker may have next to no similarities to Tesla. But it's another well-known stock that is down over 60% year to date.
Unlike Tesla, Stanley Black & Decker is a Dividend King that has paid and raised its dividend for 55 consecutive years. Dividend Kings are S&P 500 components that have paid and raised their dividends for at least 50 consecutive years.
Like Tesla, Stanley Black & Decker is facing a slew of headwinds that are applying a lot of downward pressure on its stock price -- namely declining demand and cost inflation. But the company is confident it can improve its supply chain and get its gross margins back above 35%, as well as grow cash flow and organic growth faster than its competitors.
One look at the 10-year chart of the company's stock price and its gross margin and it's clear to see the importance of getting margins back to the levels that investors expect.
A challenge facing Stanley Black & Decker that starkly contrasts with those of other industrial companies is that Stanley Black & Decker has much more exposure to the consumer instead of business-to-business sales. Tesla has the same problem. In today's economy, companies like Caterpillar, Deere, and Honeywell that mainly sell to other businesses are doing quite well, whereas those that are selling to a consumer that is tightening their purse springs are relatively more impacted by rising interest rates and inflation.
For example, Stanley Black & Decker's tools and outdoor sales were up 17% for the first three quarters of 2022. But tools and outdoor profits fell 45%. Meanwhile, the company's industrial segment saw sales rise just 4% for the first three quarters of 2022 and profits were down 17% compared to the first three quarters of 2021. Both segments aren't doing well. But the industrial business is doing a relatively better job at retaining profitability.
In its Q3 2022 investor presentation and during its Q3 earnings call, Stanley Black & Decker highlighted professional construction and industrial customer demand as a "bright spot" amid macroeconomic challenges. It expects negative organic growth for its tools and outdoor segment for the full-year 2022 but a high single-digit to low double-digit increase in industrial organic growth for the year.
Earnings declines and slowing organic growth are never what investors want to hear. But the silver lining of Stanley Black & Decker's woes is that investors can get a quality Dividend King at a price not seen for several years. Stanley Black & Decker has a dividend yield of 4.3% -- which provides a sizable passive income stream, and compensates investors for their patience while they wait for the business to turn around.
A compelling buying opportunity
If you're a net saver that regularly puts your hard-earned savings to work by dollar-cost averaging into stocks over time, then bear markets can help lead you to lasting wealth by offering you a chance to accumulate more shares for the same amount of money. So even if you have several paper losses, you can lower your cost basis while keeping the same savings plan.
Stocks like Tesla and Stanley Black & Decker could continue to go down before they go up. And given each company's exposure to the broader economy, expect growth to slow in the quarters to come.
But for investors looking to add quality names to a diversified portfolio, now looks like a good time to consider Tesla and Stanley Black & Decker -- or at least add them to your 2023 watchlist.
