As a long-term investor, if you're adding new money to your portfolio every month, it's of no consequence whether you are buying stocks hitting new highs or new lows. That's because your returns will be determined by the long-term success of the companies you hold shares of.
However, holding some cash on the sideline for those inevitable market dips makes sense, especially for those stocks you are watching but haven't pulled the trigger on because of valuation concerns.
Here are two great stocks that always look expensive but would make fine additions to anyone's portfolio if a dip creates a discounted price.
1. Costco Wholesale
Costco Wholesale (COST 1.01%) should be at the top of every investor's buy list for when the market drops. It's ideal to invest in businesses that sell goods at high volume every year. Costco is in business to deliver everyday essentials at the lowest possible prices. This is why 69 million households pay a membership fee for the privilege of shopping at any of its 853 warehouses.
Costco operates on razor-thin margins -- its trailing-12-month profit margin was just 2.55%. But this is also why investors should love the stock. A low-margin business that sells at high volumes goes a long way to keep competitors at bay, because they know it would be a losing proposition to open a discount retail store anywhere near a Costco warehouse.
Customers are attracted to Costco for value, so management makes every decision, including the design and layout of its warehouses, to deliver on that promise. It only stocks fast-selling items in a limited number of units. And Costco Next allows customers to buy select items directly from suppliers at low prices.
The company's value-oriented model means that investors can depend on steady sales even during tough economic times. Even with high inflation hurting consumer buying power lately, Costco reported an adjusted comparable sales increase of 3.5% year over year in the most recent quarter. Over the last 10 years, Costco delivered compound annual sales growth of 8.6%, with improving margins driving earnings growth of nearly 13% per year.
This consistent financial performance has meant that investors are willing to pay a higher premium to own shares. The stock currently trades at a forward price-to-earnings (P/E) ratio of 35, which is expensive considering analysts only expect earnings to grow at about 8% per year over the next five years. I wouldn't be too excited to build a large position in the stock at these prices, but at a lower valuation I wouldn't hesitate to add this top retail stock to my portfolio.
2. Lululemon Athletica
Lululemon Athletica (LULU 1.31%) is growing into the next major global brand in athletic wear. Its stock price climbed 421% over the last 10 years and has the potential to deliver a similar return over the next decade. The trend toward active lifestyles and athleisure has fueled balanced revenue growth domestically and abroad. Moreover, Lululemon hasn't missed a beat in a cold climate for the apparel industry amid high inflation.
The company's growth slowed a bit in the fiscal second quarter, but an 18% year-over-year top-line growth rate is still very impressive for this choppy economic environment. What's more, management is clearly running the business in an efficient manner, as evident by the 22% year-over-year increase in earnings per share.
North American revenue grew 11% over the year-ago quarter, but international revenue grew 52%. China represents a massive opportunity, where revenue surged 61% last quarter. Management also noted that it still has ample opportunity to drive growth in Australia, the company's most mature market outside of North America.
Other catalysts are growing men's sales -- the company has made great strides in recent years, but men's products still only account for a quarter of the business. Lululemon is also proving it can expand its assortment to serve other activities besides yoga and running, with tennis and golf collections performing well too.
The stock is not cheap, with the current forward P/E sitting at 31. But I wouldn't hesitate to buy the stock if a market sell-off pulled its P/E lower. A high-growth apparel brand that is proving it can appeal to a global customer base is worth paying up for.
