As we head into a new year – and possibly a bull market – you may be looking to pick up the bear market bargains. After all, market downturns don’t last forever. And that means cheap stocks today might not be so cheap several months from now. So where to look for these bargains? A good place to start is with companies that have challenged today’s troubled environment.
These companies recorded earnings growth. But, at the same time, their valuations have fallen. Two perfect examples are Costco (COST 0.33%) and Home deposit (HD -1.11%). Let’s take a closer look at these two cheap stocks to buy before 2023.
It’s no surprise that Costco has managed to continue growing during tough economic times. The wholesaler sells essentials like groceries and gas – and at rock bottom prices. This is exactly what buyers are looking for these days. During the last quarter, Costco’s net sales increased more than 8% and diluted earnings per share increased slightly by 3%.
Another reason shoppers keep coming back to Costco? They have already paid an annual membership fee. So it’s clear that they’ll opt for Costco whenever they can to get the most out of their membership.
Speaking of membership fees, that’s another reason to love this retailer – now and anytime. These fees are high-margin and represent recurring revenue. Last quarter, Costco reported $1 billion in membership fees. This represents 73% of Costco’s net income.
And here’s even better news. Costco membership renewal rates exceed 90%. That means Costco can really count on that revenue year after year. And during the recent earnings call, Costco suggested a increase in dues may be on the horizon. This is great news for the company and investors.
Now let’s look at today’s evaluation. Stocks are heading for a 14% decline this year. That leaves Costco trading at 33 times forward earnings estimates. Of course, that’s higher than rivals like Target Where walmart. But Costco’s membership-based business model and renewal rate make it worth it.
2. Home Depot
Home Depot continues to see strength in most of its departments. The world’s largest home improvement retailer said 11 of its 14 merchandising categories saw positive comparable sales in the third quarter.
The company is aimed at both DIY enthusiasts and professionals. Demand remains strong in both areas. But taking a look at the pro client may give us some clues as to what lies ahead. And there is reason to be optimistic. Pros report backlogs of healthy projects. This should therefore translate into revenue growth in the coming months.
As it stands, these customers drove double-digit revenue growth across departments including Building Materials, Plumbing and Lumber in the quarter.
The pro space represents a major opportunity. The market is worth $450 billion. The Home Depot has taken steps to ensure the growth of this valuable market. And that’s by serving those customers well. Home Depot aims to streamline the entire buying process for them. For example, today all appliance delivery volume is handled through The Home Depot’s market delivery operation. This has improved the quality and speed of delivery.
Home Depot has a track record of profit growth. It is also shown that he can benefit from his investments. Return on invested capital increased over time. This, and the strength we have seen in today’s tough economy, bodes well for the future of the business.
Home Depot shares are trading at less than 20 times forward earnings estimates. That’s down from about 25 earlier this year. Given Home Depot’s past earnings growth, current resilience and future prospects, this is a long-term stock to rush in and buy now.
Adria Cimino has positions at Home Depot and Target. The Motley Fool holds positions and recommends Costco Wholesale, Home Depot, Target and Walmart. The Motley Fool has a disclosure policy.