The first two-thirds of 2023 are in the books. And despite a far better year for investors than last, there are some surprising stocks that were punished.
Investors with an eye toward value have come to the right place. Target (TGT 0.18%), NextEra Energy Partners (NEP -0.89%), and the Invesco Solar ETF (TAN 2.46%) headline three top beaten-down securities to buy now. Meanwhile, D.R. Horton (DHI 0.78%) and growth stock MercadoLibre (MELI 3.09%) are soaring and still have room to run.
Maintaining a balanced and diversified portfolio centers around buying stocks in different sectors that have the potential to compound for years to come. Here's what separates all five of these investment ideas offered up by various Motley Fool contributors from the broader stock market.
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Unpacking Target's bargain-bin valuation
Anders Bylund (Target): It's time to get excited about a certain big-box retailer again. Target may have needed a price correction two years ago, but the stock's price cut has gone too far at this point.
Target's stock price is down about 15% year to date. Investors missed out on a 17% gain in the S&P 500 index over the same period. And if you zoom the chart out a bit, you'll find Target stock trading more than 50% below the all-time highs of November 2021. The S&P 500 market barometer only fell 8% over that span.
As a result, Target shares are changing hands at bargain-bin valuations again. You can pick up shares of the Minnesotan retail giant at 14 times forward earnings or 0.6 times trailing sales today. That's a steal for a company that's projected to increase its earnings at a compound average growth rate (CAGR) of 19% across the next five years.
The worries over inflation that led Target's stock to this affordable spot are running out of steam -- just in time for the various upcoming holiday shopping sprees. This year's holiday push will include expanded partnerships with premium partners such as Walt Disney, Apple, and Ulta Beauty. It will also be data-driven in a new way, leaning into the marketing value of more than 100 million members in the Target Circle loyalty program.
Target is trying new ideas at a crucial juncture in the retail market's turnaround. With share prices scraping near four-year lows, this looks like a great time to get back into Target's rock-solid retail expertise.
A no-brainer high-yield stock
Neha Chamaria (NextEra Energy Partners): When a dividend growth stock gets hammered despite potentially big catalysts ahead, you don't want to miss an opportunity to buy. Shares of NextEra Energy Partners are down nearly 30% this year as of this writing. The renewable energy giant's numbers have disappointed the markets in recent quarters, but much of the concerns are unfounded as NextEra Energy Partners' cash flows and dividends haven't stopped growing.
In its last quarter, NextEra Energy Partners increased its annualized dividend per share by nearly 12% and reiterated its goal to hike dividends every year by 12% to 15% through at least 2026. That's despite the company planning to sell its natural gas assets, which currently contribute almost 20% to its cash available for distribution.
The thing is, NextEra Energy Partners will sell its natural gas assets through 2025 to become a renewables pure-play. It has drawn up an exhaustive divestment strategy to ensure it can meet its dividend growth goal while avoiding the need to raise funds through equity. Potential equity dilution has been among the market's biggest concerns, but NextEra Energy Partners' plans should put them to rest.
In between, NextEra Energy Partners is eyeing growth through acquisitions while having access to parent NextEra Energy's huge renewables asset base to expand its own portfolio. NextEra Energy is the world's largest producer of energy from wind and solar and has nearly 31 gigawatts (GW) of capacity in operation and another 20 GW in backlog of wind, solar, and storage contracts.
So there are two key takeaways here: NextEra Energy Partners has plenty of growth opportunities in a high-potential industry, and it's confident of growing its dividends consistently, backed by steady cash flows from contracted assets. All of it makes this 6.5%-yielding stock one of the best dividend stocks you could buy right now.
The solar industry is too beaten down to pass up
Daniel Foelber (Invesco Solar ETF): Despite multidecade growth prospects, the solar industry has been absent from this year's market rally. The Invesco Solar ETF is an excellent way to track the industry because it includes a wide range of domestic and international leaders in solar panel manufacturing, parts and components, solar technologies, software, integrated systems, and more. But the ETF is down a painful 20% year to date, and that's despite the top holding, First Solar, being up 23.5% year to date. Meanwhile, the second and third-largest holdings, Enphase Energy and SolarEdge Technologies, are down 51.7% and 42.1%, respectively.
The crux of the problem is a culmination of near-term and long-term challenges colliding together all at once. Rising interest rates make project financing more expensive and reduce the return on investment of utility-scale solar projects. Meanwhile, some states are paying residents less for selling energy back to the grid. And higher interest rates are impacting consumer spending and residential solar demand as well.
A longer-term issue is that the solar industry is maturing. So, the once-high margins that were available to early adopters are getting squeezed by mounting global competition. With the overall market strained, companies find themselves undercutting each other and dragging the whole industry down.
Attempts to onshore solar through subsidies and tax credits can only go so far when the whole industry is in a downturn.
Amid the brutal summer heatwave paired with relatively high oil prices, you would think that now would be the perfect time for increased solar installed capacity. But the business cycle simply isn't as favorable right now compared to a few years ago.
It may take a while for the industry to adjust to the new normal. And with so much uncertainty, simply investing in the industry rather than a particular stock may be the simplest way to play the energy transition. The ETF has a 0.7% expense ratio, which is on the high side for an ETF. But given the exposure it offers, particularly to securities listed on foreign exchanges that would otherwise be difficult to purchase, the ETF provides a valuable service and makes the expense ratio justified.
Be like Buffett
Keith Speights (D.R. Horton): Warren Buffett celebrated his 93rd birthday on Aug. 30. In honor of the legendary investor's big day, I've chosen the stock that Buffett invested most heavily in during the second quarter (other than Berkshire Hathaway itself) as my top pick for September. That stock is D.R. Horton.
Buffett insists that he's a business picker instead of a stock-picker. With D.R. Horton, I think the Oracle of Omaha has picked a great business and a great stock.
D.R. Horton ranks as the largest homebuilder in the U.S. It's held that position since 2002. Its business prospects look great. The company reported that its net sales orders soared 37% year over year in the latest quarter. Order cancellations fell to 18% from 24% in the prior-year period.
Those results aren't surprising. The U.S. continues to experience a housing shortage. The solution to the problem is to create more housing. That's what D.R. Horton does in 33 states, including 45 of the top 50 markets.
Buffett remains a value investor at heart. I have no doubt that he likes the fact that D.R. Horton's shares trade at a forward earnings multiple of under 9.3 times. That valuation looks even more impressive considering the stock's big gain so far this year and the company's growth opportunities.
An e-commerce and fintech leader in Latin America
Trevor Jennewine (MercadoLibre): Argentina-based MercadoLibre runs the largest online commerce and payments ecosystem in Latin America, and the company is still gaining market share. Its online marketplace will account for a projected 21.6% of online retail sales in the region this year, up from 20.9% last year, according to eMarketer. That success stems in large part from its comprehensive approach to commerce. The company provides adjacent financial services (e.g., payment processing and credit) and other value-added solutions for logistics and digital advertising, all of which make its marketplace even more compelling for merchants.
MercadoLibre delivered phenomenal financial results in the second quarter despite currency headwinds and high inflation. Revenue rose 31% year over year to $3.4 billion, driven by 38% year-over-year growth in the commerce segment and 24% growth in the fintech segment. The commerce take rate (i.e., commerce revenue as a percentage of gross merchandise volume) expanded 200 basis points to 18.4% as more merchants leaned on MercadoLibre for logistics and advertising. On the bottom line, GAAP net income soared 112% year over year to $5.16 per diluted share as cost control efforts continued to bear fruit.
Turning to the future, online retail sales in Latin America are expected to grow at 14% annually to reach $307 billion by 2027, according to Statista. That implies strong growth in adjacent markets like e-commerce logistics, payments, and advertising, and MercadoLibre is well positioned to benefit from that momentum in the digital economy. The company not only runs the largest online commerce and payments ecosystem in the region but also ranks as the largest retail advertiser, and it operates the fastest logistics network.
On that note, shares currently trade at 5.7 times sales, a bargain compared to the three-year average of 10.7 times sales and a very reasonable price to pay, given the potential upside. That's why this growth stock is worth buying in September.
