I know they say to not assume. But for investors sitting on cash, I'm going to make two assumptions. First, investors are scared of losing money. Second, with some savings accounts earning up to 5% per year right now, stock buyers are also looking for investments that can do better than this.
To address these concerns, I've identified two stocks that are extremely safe and that offer really good odds of beating a high-yield savings account. These two stocks are home-improvement retail company Home Depot (HD 0.94%) and outdoor equipment manufacturer Toro (TTC 0.90%).
Here's why these two stocks could be great buys right now.
1. Home Depot
Housing is a basic human need. That makes spending on the home a top consumer concern. As the largest home-improvement retailer in the world with over 2,300 locations, Home Depot is well positioned to enjoy consistent demand, which is why I believe it's a perfectly safe stock for nervous investors.
That's not to say Home Depot will smash records every year. In fact, management expects a net sales decline between 2% and 5% this year, and investors are bracing for these negative results.
For evidence of caution from investors, consider that Home Depot stock trades at just 20 times its trailing earnings, which is a slight discount to its long-term average. And that's cheaper than the valuation for its top rival, Lowe's. This cheaper-than-normal valuation makes an investment in the long-term success of Home Depot a timely one.
Without getting too deep into the weeds, Home Depot's track record proves worthy of an optimistic outlook for shareholder returns. The company's free cash flow is strong, its dividend consistently increases, and its outstanding share count consistently decreases, as seen in the chart below. All of these things are reasons to believe that Home Depot stock will make investors money over the long haul.
HD Dividend data by YCharts.
2. Toro
I'm not convinced that Toro stock will outperform the S&P 500. But I am convinced that it's a consistent performer, that it has upside ahead, and that the stock is a relatively good deal right now. Here's why.
Just to give one data point regarding consistency, Toro has paid and increased its dividend for 14 consecutive years. That doesn't just happen. To sustain dividend growth for this long, companies must be growing profits consistently. That's the case with Toro.
Regarding upside, I'm optimistic about a catalyst on Toro's horizon. Consider that in its fiscal third quarter of 2023 (ended Aug. 4), the company's net sales were down 7% year over year. In other words, demand dropped somewhat from its record results in its fiscal 2022. But an important new partnership could lead to new record results in fiscal 2024.
People can buy Toro equipment at Home Depot and other major retailers. However, the company is launching a strategic partnership with Lowe's in early 2024.
With over 1,700 locations, Lowe's is the second biggest home-improvement retailer behind Home Depot. Therefore, this is a major partnership for Toro. Just getting its products in front of that many more shoppers will likely lead to higher net sales in fiscal 2024 and beyond.
Finally, I won't go as far as to say that Toro stock is dirt cheap. But on a price-to-earnings (P/E) basis, Toro stock is trading at a discount to its 10-year average, as the chart below shows.
TTC PE Ratio data by YCharts.
Both Home Depot stock and Toro stock are better investment options than cash, in my opinion. These are stable companies that have historically taken care of their shareholders. And that should mean a lot for anyone looking for a measure of safety in the stock market.
