Hopefully, investors are learning a lot during this bear market. For a while, during a years-long bull market, investing looked easy, since stocks were almost uniformly going up for a long time. Now investors, especially new ones, are getting to see more of a cycle and understanding the power of successful investing strategies such as buy and hold and the value of diversification.
Growth stocks were all the rage for a long time, but many of these stocks saw their prices dive in the past 12 to 18 months, and value stocks are demonstrating their worth in a pressured economy. That's why Coca-Cola (KO 0.68%), Costco Wholesale (COST -0.55%), and Starbucks (SBUX 1.09%) all look like no-brainer buys right now. Let's find out more about these three stocks.
1. Coca-Cola: Beverage and Dividend King
After getting rattled at the beginning of the pandemic, Coca-Cola kept its wit and its dividend -- and rebounded in a better place than it was even prior.
So far, it has fared well during this bought of elevated inflation, successfully raising some prices and demonstrating stronger profitability. But a slowing economy created by rising interest rates is starting to have an effect and slowing the company down a bit in its most recent quarter. Revenue for the latest quarter increased 5% year over year to $11 billion, and margins narrowed. Earnings per share (EPS), though, increased 12% over last year to $0.72.
Two of the significant actions it took during the early stages of the pandemic were cutting about half of its line of beverages to focus on better-performing brands and restructuring its segments to operate more efficiently. These are still driving performance under the current challenging circumstances. It's leaning into its core beverage lines and developing global partnerships to bring the right drinks to the right markets. Management is guiding for high-single-digit growth for both revenue and EPS for the full year.
Coca-Cola is a Dividend King, and it has raised its dividend for over 60 years. Its dividend yields nearly 3% at the current price, which is around its average. It's a secure, income-generating stock that should pay shareholders for many years to come. The stock is trading down about 6% year-to-date, offering a buy-in opportunity.
2. Costco: The warehouse model king
Costco's incredible streak of double-digit year-over-year sales growth lasted for about two years, much higher than its typical mid-to-high single-digit growth. In the fiscal 2023 third quarter (ended May 7), Costco actually reported an unusually low 1.9% year-over-year increase in sales. EPS declined from $3.04 to $2.93.
That's a stunning report from what's usually a reliable winner. Regardless, the stock price actually jumped after the results were released last week. That's because the underlying metrics were too impressive to miss, and the current operational performance is so clearly being hit by external factors and not a reflection of internal issues.
About the lower earnings: Costco created its own supply mechanism to keep merchandise flowing last year when there were supply chain logjams. Now that problems in the standard supply chains have eased and these systems are cheaper to use than keeping up its own fleet of vessels, Costco downsized its vessel fleet and took a one-time charge related to the closure.
Membership fee income, which powers the bottom line, increased 6.1% to more than $1 billion. Members may not be shopping quite as much as they were before, mostly by way of dropping big-ticket items, but they're keeping their Costco memberships to the tune of a higher-than-90% global renewal rate, or record levels. More people are still joining, with membership up 7% more than last year.
Something that stood out in the report was the increase in international comparable sales. Costco opens around 25 stores annually, and it's making deeper inroads into international locations. It still has plenty of expansion opportunities domestically, but the international roadway is wide open.
U.S. comps, which might be milked for all their worth to some degree while the environment is still inflationary, were essentially flat in the third quarter and up 1.8% adjusted for changes in gas prices and foreign exchange. International comps were up 4.1% and 8.4%, adjusted.
Costco's stock is usually on the pricey side, but even with the price jump after the report, it still trades below its three-year and five-year price-to-earnings ratio averages. Now might be a good time to buy-in.
3. Starbucks: The king of coffee
Starbucks elevated the humble cup of coffee into a customized beverage experience, generating high sales growth as it continues to open new stores at a fast pace. The beauty of the model is that it provides a luxury item at a price many people can still afford, regardless of the economic climate, as opposed to an expensive appliance or fashion product.
Starbucks was beaten down at the beginning of the pandemic, but through a focus on digital channels and a dramatic pivot to operational strategies like drive-up and curbside delivery, it bounced back phenomenally and is moving forward despite inflation.
In the fiscal 2023 second quarter (ended April 2), revenue increased 14% over last year, with an 11% increase in comparable sales. Operating margin increased from 12.4% to 15.2%, and EPS rose 36% to $0.79. Starbucks opened 464 net new stores in the quarter for a total of 36,000, and it still sees plenty more expansion opportunities.
Starbucks got a new CEO in April, and it's developing a new growth strategy based on healthier performance and an omnichannel focus. Customizing drinks has become complicated, so it's investing in new equipment and technology.
Starbucks also pays a dividend that yields 2.1% at the current price, making it a compelling stock to own for long-term growth and income.
