The stock market has been volatile over the past few months, having risen to record highs after plummeting in 2020. Despite small setbacks, it keeps climbing, and steep valuations mean that the market might be in for a bigger correction.
In the meantime, investors should look out for market dips or for stocks trading below some of the astronomical valuations of today. Target (NYSE:TGT), Home Depot (NYSE:HD), and Disney (NYSE:DIS) are three great picks. Let’s see why.
When was the last time you ordered from Target?
If you’re like many Americans, you ordered from the retailer pretty recently, and pretty frequently. Target was the source for millions of customers to get their essentials and other products during the pandemic, and the company had its best quarters in years.
Newer investors might not realize that only five years ago, Target was struggling without a clear path forward. New management laid out a plan to get back on track that included serious investments in what was still a novel digital program, and that has galvanized sales as it had a first-mover edge when digital exploded.
Moving on, there are many reasons to be confident in Target’s future. First is its continually improving omnichannel strategy — specifically its same-day delivery, where it’s adding products to the same-day-shipping options. But brick-and-mortar stores are also a major player, and they accounted for most of the growth in the first quarter, taking over from the digital sales that powered growth last year.
The company is also expanding its successful house brands and opening new stores in various layouts, such as the small-store format that has captured market share in denser areas.
There are fears that companies that performed well during the pandemic will have a tough time matching 2020 comparable-store sales, but Target might have long-term positive effects from its performance. In the first-quarter conference call earlier this year, CEO Brian Cornell said, “This year, sales growth reflected more than $1 billion in market share gains, a clear signal of how relevant guests find our experience even though they have many more shopping options available compared with this time last year.”
What might be less well known is that Target will become a Dividend King when it pays its dividend in September. It increased its quarterly dividend 32% to $0.90 per share, yielding 1.1% at the current price. That’s below the S&P average, but it provides security in a stock that also offers high growth potential.
Target stock is trading at a cheap P/E ratio of 20 times trailing-12-month earnings. Investors should consider this value pick that offers stability in any environment.
Home improvement may be slowing down. Home Depot isn’t.
One category beyond essentials that grew during the pandemic was home improvement. As the market leader, Home Depot was a beneficiary of that, which continued into the first quarter with a 33% sales increase, adding more than $9 billion to the top line. And comps kept up with that at 31% growth. That was the company’s biggest increase since the pandemic started, and the first one where it outdid rival Lowe’s.
Customers might be spending on travel and other luxury purchases now that the U.S. economy is reopening, but Home Depot’s investments in its business are keeping sales growth high. The forward-thinking company invested several billion dollars in its digital strategy way before most Americans knew what a pandemic was, and it was positioned to rake in sales when people stayed home. Not only did it upgrade its website and offer more competitive shipping options, it also opened new distribution centers and improved its supply chain to get more products to more people faster.
Some of its newer ventures are tool-rental reservations and a mixed-cart program, which lets customers and associates add products from both the website and store to a single transaction.
Home Depot shareholders can expect this vision to drive increased sales for years to come. Its dividend yields 1.98% at the current price, way above the S&P average, and shares are trading at a reasonable 23 times trailing-12-month earnings.
Less stability, but lots of opportunity from Disney
Disney is the outlier on this list. Sales dropped steeply during the pandemic; shares are trading at 72 times forward one-year earnings; and it still hasn’t reinstated its dividend, which was suspended last year to preserve cash.
But in its favor, sales are coming back. And when they do, the stock price will soar. Some of the growth is baked into the current price, but Disney is not in the overvalued camp. It’s a great pick before a market rally.
Part of the sales increase will come from reopened parks, but those will still come in below pre-pandemic levels, since capacity restrictions remain in place. The main growth driver over the past year was the Disney+ streaming service, which exceeded expectations with more than 100 million subscribers, helping push up sales. That growth is slowing down, but the company expects a total of up to 260 million subscribers by 2024. It’s leaning into streaming, where its content library gives it an edge, and it launched the Star brand globally to complement Disney+, ESPN+, and Hulu.
With its streaming capabilities, content library, and all of its businesses (including other networks, products, and new film production), investors can expect long-term growth from Disney stock.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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