The stock market spat 17% of its value from January 3 to May 24. This offers investors an opportunity to improve their portfolio. You can sell shares at a loss, possibly reaping a tax deduction. And you can replace them with good stocks selling 15-30% below their highs.
Here are five stocks that have been hit hard this year and are now buys in my opinion. Could they go any lower? Of course they could. Catching the exact bottom is a matter of luck. Still, I think if you buy them now, you’ll be glad you did.
Based in Santa Clara, California, Applied materials
is the world’s largest supplier of semiconductor manufacturing equipment. The stock peaked in January at around $167. It sells for less than $120 now.
Does anyone doubt that semiconductor chips will remain in high demand? Computers, smart phones, home appliances, and cars all use more chips, and more advanced chips, over time. Although the stock was slammed, the company is doing well. Sales increased by 28% last year and profits by 56%.
So, what is this stock suffering from? As interest rates rise, a dollar of income in the future – say, in 2029 – loses value. Growth stocks were therefore penalized, especially technology.
As of May 27, Applied Materials shares have sold for 16 times earnings. That strikes me as quite a reasonable valuation for a company that has grown revenue at an annual rate of 14% over the past decade and has grown considerably faster in profit.
The largest home builder in the United States, DR Horton (DHI) fell 29% this year through May 27. The entire homebuilding group took a hit – and for logical reasons, but I think the sell-off was overdone.
What investors fear is that mortgage rates will rise, stifling home buying. It’s a rational fear, but it has driven Horton’s price down to five times its earnings, which is extremely cheap.
Home prices have risen sharply over the past two years, excluding some potential buyers. But I think demographics are on the side of home builders. Millennials are coming of age. Like many of their parents, they may want single family homes for their children. Horton’s ROI has been above 10% (my favorite area) for five consecutive years.
Sell about 35% below its eastern high Braunschweig
, which manufactures boats, outboard motors, fitness equipment and billiard equipment. I think investors have two fears about Brunswick. The first is that a recession is coming soon, crippling sales of all recreational gear, especially boats.
I believe there will be no recession in 2022. Major economic indicators (designed to be predictive) are still trending up and coincident (real-time) indicators are healthy.
The other fear comes from the fact that Brunswick has taken advantage of the pandemic. Boating is an outdoor recreation, relatively safe from Covid-19. When the pandemic ebbs, people think Brunswick’s profits could dwindle. The pandemic likely helped Brunswick, which gained 20% on invested capital last year. But the return was above 10% in 10 of the last 12 years.
shares fell nearly 25% in a single day on May 18. It reported a poor first quarter as its costs for goods, shipping and labor rose. Like many retailers, he dares not raise prices accordingly, fearing buyers will flee. One of my mantras as an investor is to seek stocks depressed by real but temporary bad news. I think Target’s issues fit that description, although issues can last for a while.
The target has exceeded my ROI target (10% or more) in 10 of the past 15 years. I don’t expect a recession, but if one is to hit, Target is among the best places to be, as consumers turn to Wal-Mart and Target for more expensive stores.
Down 31% this year through May 27, MKS Instruments (MKSI) manufactures process control instruments and systems used in the manufacture of semiconductors, flat panel displays, medical devices and other things.
MKS, which is based in Andover, Massachusetts, has been profitable for 14 of the past 15 years and has beaten my return on capital guideline 10 times.
Given that the company’s sales and earnings have been strong lately, I consider the stock to be just another victim of the tech selloff. At 12 times earnings, I think that’s a good deal.
Disclosure: I own DH Horton stock personally and for most of my clients. I own Applied Materials for one or more clients.