Earlier this month, the consumer price index’s better-than-expected reading of 7.7% gave investors respite from the slowdown in financial markets that has largely persisted throughout this year. But even after the recovery that followed the release of these economic data, the S&P500 the index is still down 17% so far in 2022.
But by adopting a long-term investment mindset, investors can use this market downturn to their advantage. I recently added to my positions at the home improvement retailer Home deposit (NYSE:HD) and the tobacco giant British American Tobacco (NYSE: BTI). Let’s look at the buy cases for the two stocks.
1. Home Depot
With 314 billion dollars market capitalization, Home Depot is the world’s leading home improvement retailer. However, as dominant as Home Depot is in its space, investors might be shocked to learn that the company’s retail market share of the $900 billion U.S. home improvement market was just 15 percent. % in the previous year. For context, that was considerably higher than Lowe’s 10% retail share.
The fragmented nature of the US home improvement market means Home Depot has the flexibility to make add-on acquisitions to further strengthen its competitive position. This is a catalyst that should propel the company’s net sales and profits higher over time.
And with the part of the professional contractor of its activity around 50%, Home Depot continues to conquer the most lucrative clientele. Pros are the most sought-after customer because they spend more often and more than do-it-yourselfers, driving Home Depot customers to profit margin to the top.
Down 27% from its 52-week high, shares of the home improvement retailer have been hammered in 2022. Indeed, with the 30-year mortgage rate around 7% and interest rates continuing to rise. rise, home sales are expected to cool to a halt. But even with this near-term headwind, analysts predict Home Depot’s annual earnings growth of 15.7% over the next five years.
The stock’s 2.5% dividend yield is significantly higher than the S&P 500 Index’s 1.6% yield. And given that Home Depot dividend distribution rate falls below 46% for this fiscal year, the company should have the ability to continue to increase its dividend in the future. Even better, the shares can be acquired at a price-to-earnings (P/E) ratio of 18.5. This is a reasonable premium to the average forward P/E ratio for the S&P 500 home improvement sector of 16.
2. British American Tobacco
Since its founding in 1902, UK-based British American Tobacco has grown into a tobacco juggernaut. With more than 52,000 employees in more than 175 markets around the world, the company is the second largest tobacco company behind Philip Morris International (NYSE:PM).
British American Tobacco is no ordinary tobacco company. With brands like Camel, Newport and Pall Mall contributing 88% of the company’s total revenue, British American Tobacco still relies primarily on combustible cigarette brands.
But let’s not forget the company’s incombustible products, including major brands such as vaping brand Vuse, heated tobacco brand Glo, and oral tobacco brand Velo. These brands have a collective customer base of 18 million. And by 2030, British American Tobacco estimates that number will triple to 50 million. That’s why analysts expect the company to post annual earnings growth of 12.2% over the next three years.
British American Tobacco offers income-oriented investors an outsized dividend yield of 7.7%. Given that the dividend payout ratio will settle at less than 62% over the next 12 months, this huge return also seems safe. And if an attractive mix of income and growth isn’t enough for investors, British American Tobacco is also cheap. The stock’s forward price-to-earnings ratio of 9.3 is significantly lower than the S&P 500 tobacco industry average forward price-to-earnings ratio of 12.5.
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Kody Kester has positions at British American Tobacco, Home Depot and Philip Morris International. The Motley Fool fills positions and recommends Home Depot. The Motley Fool recommends British American Tobacco and Philip Morris International and recommends the following options: long calls of $40 in January 2024 on British American Tobacco and short calls of $40 in January 2024 on British American Tobacco. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.