This article discusses three stocks worth buying when the stock market pulls back. But I need to season this subject with a grain of salt first. Investing great Peter Lynch probably said it best when he said, "Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves."
Lynch observes that waiting for stocks to pull back is often counterproductive. Over the last century, stocks have increased in value far more than they've pulled back. Therefore, by the time a pullback happens, stocks have often gone up so much that the pullback price is still higher than what the price was when investors started waiting in the first place.
With this in mind, short-term rental company Airbnb (ABNB 0.75%), home-improvement retailer Home Depot (HD 0.94%), and sporting-goods retailer Dick's Sporting Goods (DKS 1.43%) routinely post strong financial results. This makes them top candidates to add to a portfolio when market conditions knock shares down a notch.
1. Airbnb
Through the Airbnb platform, travelers are booking over 100 million nights and experiences every quarter, showing its immense popularity. And this is a high-margin business model, which is what I like. Over the last 12 months, the company has $4.2 billion in free cash flow, which is a 44% margin over this time. I struggle to find businesses with margins this good.
Investors are likely quite familiar with the main points about Airbnb, but perhaps many are unaware of how the company is exploring artificial intelligence (AI) to improve its business.
One thing that Airbnb's hosts hate is wild parties that wreak havoc on their properties. To address this, the company's AI is compiling factors that point to possible party animals, to stop them from booking beforehand. Management says it's working, which is good for its community of hosts.
In November, Airbnb made its first acquisition as a public company: GamePlanner.AI. This AI start-up was founded by Adam Cheyer, a person whose background is in voice-assistant technology. It's possible that combining AI with voice-assistant technology could suggest a conversational way to search and book listings on Airbnb, perhaps elevating the user experience.
Airbnb's business is popular and has great margins. And AI could potentially improve the experience for both travelers and hosts. For these reasons, I believe that if the market ever pulled back, it could be a great time to pick up some Airbnb stock.
2. Home Depot
I don't review Home Depot's financials everyday. But when I do, I normally say, "Wow, not bad." Investors can almost always count on strong sales and eye-catching profits. For this reason, if there were a market pullback, I'd quickly review Home Depot stock because chances are business would be good, long-term prospects would be bright, and the investment opportunity would be timely.
2023 is one of the few years on record when sales have dropped for Home Depot. Through the first three quarters of 2023, the company's net sales have dropped 3% from the comparable period of 2022. Its same-store sales have taken a hit as consumers grapple with high inflation and contractors are faced with a slowing housing market.
Even in a "bad" year, Home Depot's financial results look good. Its profit margin of 10.5% is nothing to sneeze at. And the management team likes rewarding shareholders with share repurchases and regular dividend increases as the chart below shows.
HD Average Diluted Shares Outstanding (Quarterly) data by YCharts
If an investor believed that home-improvement spending is going to decline over the coming decade, then Home Depot stock wouldn't be a good one to keep on their watch list. However, I believe this is a resilient spending category that should generally see long-term growth, which is why I'll always keep Home Depot stock on my radar.
3. Dick's Sporting Goods
Like home-improvement spending, the sporting-goods space is also fairly resilient. Profit margins can fluctuate based on how strong demand is and how much promotional pricing is needed to stimulate sales. But sales often rise and margins usually hold steady, which is why Dick's Sporting Goods stock is always one to keep an eye on.
DKS Revenue (TTM) data by YCharts.
For those worried about a brick-and-mortar concept in the age of e-commerce, breathe a sigh of relief. Dick's has a strong omni-channel strategy supported by its e-commerce operations. Moreover, with batting cages and golf simulators, Dick's gives shoppers a good reason to visit its stores in person.
And for those worried about sports equipment and apparel manufacturers that sell directly to consumers, bypassing Dick's, don't forget that Dick's has a large portfolio of its own brands. These exclusive brands accounted for 14% of sales in 2022 -- the last full-year update on this from management. Therefore, consumers do go to Dick's for things they can't buy elsewhere.
Up over 300% in the last five years, Dick's performance is not a fluke, in my view. The company has a long history of growth, profitability, and shareholder returns -- which is why this stock joins Airbnb and Home Depot as stocks to buy whenever the market pulls back.
